Freny Patel: The downside of entrepreneurship

Institution-backed private banks are more successful than their entrepreneur-led counterparts

If statistics are anything to go by, the dice seem to be loaded against entrepreneur-led private sector banks. Consider this: of the nine new-generation private sector banks that came up a decade back, two "" Global Trust Bank (GTB) and Centurion Bank "" were entrepreneur-led and both have been case studies in mismanagement.

The latter, of course, got a fresh lease of life last year, having been taken over by an investor group led by BankMuscat and Sabre Capital. GTB on the other hand, is the first instance of the regulator stepping in to essentially bail out the 10-lakh-strong depositor base.

In stark contrast, the institution-backed private sector banks "" HDFC Bank and ICICI Bank "" are doing remarkably well, giving their public sector counterparts a run for their money. Other institutional outfits, namely IDBI Bank and UTI Bank, are no longer laggards.

However, the future for IDBI Bank, currently in the midst of uncertainty as its parent Industrial Development Bank of India (IDBI) converts from a development financial institution to a bank, remains uncertain.

It won't be the first instance of a new generation bank being gobbled up: the consolidation phase in this sub-sector began with HDFC Bank taking over TimesBank in late-November 1999.

The first merger among private sector banks saw HDFC Bank's total assets bloat almost three-fold, from Rs 4,349.96 crore in fiscal 1999, to Rs 11,656.14 crore in the following financial year. Today, HDFC Bank's total assets have crossed Rs 42,300 crore as on March 31, 2004.

Similarly, following the reverse merger of the parent ICICI into ICICI Bank, the bank's total assets grew a stupendous 400 times in March 2002, to Rs 104,106.3 crore. Since then its assets have risen a further 20 per cent to Rs 125,228.87 crore.

And now GTB is being amalgamated with Oriental Bank of Commerce (OBC) following the financial irregularities and a gaping hole in its balance sheet to the tune of Rs 1,500 crore.

According to figures available with the Reserve Bank of India (RBI), GTB's total assets were Rs 6,800 crore as on March 2004.

However, its entire net worth has been wiped out, thanks to "violations of internal procedures in sanctions and disbursements," says original promoter Ramesh Gelli.

So, has the experiment of introducing new generation private sector banks succeeded or failed? Certainly, the cases of failure among entrepreneur-led banks are a cause for concern and perhaps a case can be made for the RBI to impose strict guidelines when it comes to restricting ownership to a handful of investors.

At the same time, the ICICI Bank and HDFC Bank cases are admirable. Now a universal bank, ICICI Bank has the distinction of being the first Asian bank to be listed on the New York Stock Exchange for its American Depository Receipts.

Its bottomline has been growing at rates from 35 to well over 60 per cent over the past five years. In the fiscal just gone by, ICICI Bank's net profit rose by over 35 per cent to Rs 1,637.11 crore.

What's interesting is that in terms of profitability, ICICI Bank today is second only to State Bank of India (SBI) whose net profit in fiscal 2004, was Rs 3,681 crore, against ICICI Bank's Rs 1,637 crore.

HDFC Bank's net profit, however, stands at about one-third of that of ICICI Bank. In fiscal 2004, its net profit figure stood at Rs 509.5 crore. Nevertheless, its performance has been remarkably consistent with growth rates of 30 to 45 per cent.

More importantly, one should also see how the performance of public sector banks and service with regard to customers has improved by leaps and bounds with the introduction of the new generation private sector banks.

"Private sector banks have been successful in weaning away a number of depositors from their public sector counterparts by the quality of services they offer and the use of a technology platform, making it redundant for customers to come to branches," points out a senior manager at a leading private sector bank.

Instead of concentrating solely on fund-based activities, the new private sector banks have created a business mix whereby a significant portion of total income now comes by from fee-based activities. The top banks in the industry are those that have a business mix with fee-based activities contributing between 25 and 40 per cent of total income.

What's more, new generation private sector banks have gone into areas that earlier were solely under the domain of public sector banks. Players like IDBI Bank and HDFC Bank are today keenly competing to handle government business, including tax collection, pension disbursement and other expenditure transactions.

Interestingly, only the four new private sector banks promoted by institutions "" HDFC Bank, UTI Bank, ICICI Bank and IDBI Bank "" have been permitted to handle government business as sub-agents of the RBI.

Since the transactions involved are of sovereign nature, the RBI was reportedly not too comfortable with banks not having been promoted by financial institutions. This once more pushes the case for the success of institution-backed new banks.

The 11 Players

• Centurion Bank: Posted a Rs 105.14 crore net loss in March 2004, but is on the rebound path with BankMuscat and Sabre Capital infusing funds and taking over the reins.
• Global Trust Bank: Made a flying start in 1993, clocking Rs 100 crore of deposits on Day One. Ran into bad loan problems of Rs 1,500 crore. Is now being merged with Overseas Bank of Commerce following the Centre's imposition of moratorium. Posted Rs 272.7 crore net loss in the year ended March 31, 2004.
• Times Bank merged with HDFC Bank in the first deal of its kind in the country between two new private sector banks in November. Merger effective from December 1, 1999.
• HDFC Bank has been doing well ever since, clocking industry-best growth rates. Its net profit in the first quarter ended June 30, 2004, was Rs 139.97 crore, while net profit for the year ended March 31, 2003, was Rs 509.5 crore.
• ICICI Bank merged with Bank of Madura in a 2:1 swap deal in December 2000. The move made ICICI Bank among the biggest private players in the country. Its consolidation move continued and in October 2001, it merged with its parent, financial institution ICICI, in a 1:2 swap. ICICI Bank posted a net profit of Rs 510 crore in the first quarter. Its bottom line for the financial year ended March 31, 2004, stood at Rs 1,637.1 crore.
• IndusInd Bank, another new private sector bank, has also been among the best performers. It ramped up its balance sheet in December 2003, when it merged with Ashok Leyland Finance.
• IDBI Bank, too, has been among the performers. It could be merged into parent IDBI when the financial institution converts itself into a bank.
• UTI Bank has been yet another consistent performer over the past few years. It posted a 45 per cent growth in Q1, with net profit of Rs 70.67 crore, while its full year 2004 bottomline stood at Rs 278.31 crore. The bank has also reported improvement in the quality of assets due to significant growth in non-performing assets provisioning.
• For the year ended March 31, 2004, Bank of Punjab's net profit was Rs 370.02 crore.
• Kotak Mahindra Bank, the newest bank to launch business, has had a good start, clocking a net profit of Rs 78.73 crore in 2003-04, against Rs 44.96 crore the previous year.
• YesBank, promoted by former Rabobank chief Rana Kapoor and the last new private sector bank to get a licence from the Reserve Bank of India, is yet to begin.