Yes Bank is the youngest private bank in India — it is just five years old. Having gained a strong foothold in corporate and institutional banking as well as commercial banking, it is currently on a drive to tap the vast but somewhat amorphous market for small enterprises. Yes Bank Founder, Managing Director and CEO Rana Kapoor is confident that the potential is huge and risks close to none. The bank has around 8,000 relationships in this segment and claims to have mapped about 1,50,000 such relationships. The small enterprises segment is also important, says Kapoor, as it’s the base on which the bank is building its retail banking business. In a conversation with Bhupesh Bhandari and Amit Ranjan Rai, he discusses the opportunities in different segments and the bank’s growth strategy.
In one of your interactions with Business Standard a few weeks ago, you said that Yes Bank doesn’t have a compelling proposal for retail banking....
What I said was fairly accurate. I said that we don’t have a compelling proposition for consumer lending, that is, retail lending. I did say we don’t see an immediate opportunity for a bank like ours to step into consumer lending, but I also said that we have a very compelling case to build our branch banking model, a high street retail model focussed on deposit mobilisation and distribution of products.
Most certainly, there is a branch banking model that we are working on. We have established almost 135 branches in about five years, with our core infrastructure in place in 125 branches. We will build more branches steadily. The target is 250 branches by the end of next year, about 400 by 2012 and anywhere between 600 and 750 by 2015.
Is real estate less of a constraint in branch expansion these days?
Rents are meaningfully down today. So it is a good time to go for long-term leases and take advantage of this opportunity to reduce long-term fixed costs. We are renegotiating most of our leases — some which were acquired in 2006-07 and even in the first six months of 2008. We are on target for a 15 per cent reduction in some of the leases which were mobilised in that period. The new leases, we are finding, are about 30-40 per cent cheaper compared to nine months ago.
What is your average real estate cost at the moment?
The average rental cost depends on the location. Mumbai and Delhi are obviously far more expensive. High street locations in Bangalore and Chennai are also fairly expensive — the rental costs can be anywhere between Rs 90 and Rs 120 per sq ft. But in tier II cities, they are between Rs 25 and Rs 45-50 per sq ft, depending on the location. We make no compromise when it comes to location. But overall, the rates have dropped by 30-40 per cent, which is good for banks.
How has the high street positioning helped?
The positioning of the bank here is to cater to small businesses. The wholesale banking business — which is 63 per cent of our business and really our bread and butter for the last five years — is not very branch-predicated. The second business that we have built as a long-term value driver for the bank is commercial banking, which is for mid-sized businesses between Rs 100 crore and Rs 1,000 crore.
The third one, which we are working on right now, is small business banking — catering to small businesses around our branch service area. Invariably, we find that in most cities there is a convergence of small businesses in a few locations whether they are retail businesses or offices of small businesses. We have been setting up our branches in high-density small-business locations to tap these businesses which are multiple product users — you can offer them products and services such as working capital management, deposit accounts, cash management, wealth accounts, salary accounts, remittance payment, receivables management and so on. So the bank’s ability to cross-sell is much higher in addressing small businesses.
And it’s not a lone product that we want to cross-sell — on average there would be about three to six products per company. The high street positioning is also geared towards getting employee accounts. Once we complete this part of our strategy, we will build our retail density. Right now retail is being built on the back of small businesses. So when this part of the business, which is still in the investment mode, starts flourishing, there is a compelling reason for us to increase our retail span across the country.
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Aren’t small businesses riskier?
Not really. We don’t have a single NPA (non-performing asset) in this portfolio. We only have one small restructuring, which is a Rs 2.5-crore account.
At the moment your CASA (current and saving accounts) is around nine per cent. What are your projections?
At 100-plus branches we are now at the inflection point where we can build CASA. Our target now is to increase our CASA to up to 25 per cent by March 2012. That’s an uncompromising target and our rank-one objective. We plan to raise it to a minimum of 40 per cent by 2016. Then our deposits mission will be somewhat more sustainable. This is one big area that as an organic bank we need to address. It is the single biggest remaining challenge.
How many of your 100-plus branches are profitable?
We classify our branches into four categories — metro, urban, semi-urban and rural. The objective is that in a certain lifecyle all of them should break even and make money for the bank. If you look at the branches in a silo, it takes very long for them to be profitable. But if you start looking at the earnings of our branches in terms of the contents of banking provided through wholesale banking, commercial banking and so on, they are all making money. But there are 20-25 per cent branches at any stage that are below the break-even point. Semi-urban and rural branches take anywhere between two-and-a-half and three years to break even. We find metro and urban branches break even much faster, that is, in around 15-18 months.
What is your average cost of funds?
It has dropped marginally to 8.6 per cent and in a declining interest rate market we should be able to achieve consistent improvement in our cost of funds. We have actually improved our net interest margins. Our NIM for fiscal 2008-09 was 2.9 per cent and in the March quarter it was at three per cent. I have every reason to believe that we will be able to maintain it at three per cent.
With an eight-nine per cent CASA and a NIM of three per cent, if we actually increase CASA to about 25 per cent, our NIM can improve to a minimum of 3.75 per cent. At about 40 per cent CASA, we will have anywhere around 4.25 per cent NIM.
At eight-nine per cent CASA, to have a NIM of three per cent is very unique. There are banks whose name I would not like to mention, that operate at NIMs of 2-2.5 per cent with 30-35 per cent CASA. So there is a lot of scope for us to improve our margins in future.
You have talked about comprehensive banking solutions to companies, their promoters, employees and so on. How many accounts do you have where you provide such comprehensive solutions?
In wholesale banking, we have banks with about 160-170 core relationships but the potential we have there is of, say, 500-600 core relationships. Today, we are selling these 160-odd relationships between 2.5 and three products per relationship, but the potential there is to sell five-six products as we improve the penetration level. Thus, the growth opportunity is tremendous.
In the commercial banking business, we have around 440-450 core relationships. The scope here is no less than 5,000 relationships. By 2015, we should have at least 5,000 relationships — 2,500 by 2012. This segment is a key value driver.
In small business banking, around our core 90 branches — out of 125, 90 are core — we have mapped about 1,50,000 relationships. Right now we bank on only 8,000.