“The bank’s legacy book is negligible now. The stressed telco has also honoured its scheduled repayment of funded loan,” Sumant Kathpalia, MD and CEO of IndusInd Bank, announces with a gleaming smile as he walks into the meeting room for our interview. When he took charge four years ago, there were structural deficiencies, not to mention the investors’ lack of faith in the bank. Three unanticipated but critical issues needed attention: the bank’s exposure to promoter lending; its lending to holding companies with bleak cash flow; and its unviable liabilities composition.
Untangling the knots
On February 27, 2020, when Kathpalia was named to succeed Romesh Sobti as the bank head, it was presumed, even internally, that he would have an easier time compared to other bank CEOs.
However, that was not to be.
The day he took charge — March 24, 2020 — the country went into an unprecedented lockdown to fight the Covid-19 pandemic. IndusInd Bank stock, which was already a ‘falling knife’, plunged to an intra-day low of ₹250 apiece to close at ₹312. A day later, it hit an all-time low of ₹301.3.
The bank’s gross non-performing assets spiked 13 per cent and provisioning cost increased 71 per cent year-on-year, dragging down net profits by 36 per cent. But that proved to be the worst of IndusInd Bank’s troubles. Net profit has since compounded annually by 37 per cent in FY23 and the stock currently trades at ₹1,485.6 apiece.
“There were a lot of learnings in the first 100 days,” Kathpalia recalls. Namely organise granular funding before growing the balance sheet; don’t rely on borrowings; the confidence of stakeholders is critical but, for a bank, trust is more important; the market knows more than you, don’t try to circumvent it; be upfront about losses; and the business model must be differentiated and self-sustainable.
“As a midsized bank, you need to have domains in which you can specialise and create a differentiated strategy. You cannot follow a large bank model,” he explains, signalling a departure from the bank’s earlier modus operandi.
Known to be a career foreign banker until he joined IndusInd Bank, he was one of Sobti’s trusted men and a retail banking expert, heading consumer banking before moving to the corner office.
“Mr Sobti did a fantastic job of creating the bank from where it was to what it is. I’ve never undermined the way the bank was run, and the organisation was created. There were inherent strengths,” he says, adding that he is crafting his strategy around these strengths.
Key focus areas
“Our whole objective is to play in businesses where we have a right to win,” Kathpalia says emphatically.
Towards this end, the bank is building granularity in its books, even though it retains 26 per cent exposure to vehicle finance, which Kathpalia terms as the bank’s strength, as it commands 11 per cent of the segment’s market share.
He draws attention to the diversification in the portfolio over the past three years. The share of the medium and heavy commercial vehicle (M&HCV) business fell to 25 per cent of the overall vehicle business from a bigger share five years ago. It has built up the light CV segment to 10 per cent market share; commenced a car loan vertical, which feeds its deposits and has garnered 4 per cent market share; and entered the used cars and tractor loan business with 9.5 per cent market share.
“Now, it’s a variety of vehicles... in the last quarter, while the CV business grew by 1 per cent, our vehicles business grew by 20–21 per cent,” he says. Helping beat market vagaries, he is extending the learnings to the microfinance business.
This business was likely Kathpalia’s biggest headache by far, thanks to the whistleblower charges in November 2021. It was back to square one on many counts, including regaining the confidence of the regulator and investors. Yet, three years later, he remains proud of what the business has achieved.
“We are financing nine million women entrepreneurs at the bottom of the pyramid and have seen how we are changing their lives. I think it is important we’re part of the country’s inclusive story,”
That said, microfinance was the bank’s sole segment that lost market share from 11 per cent three years ago to 9.5 per cent, following a tightening of internal practices.
The segment now focuses on expanding to more centres and growing its customer base rather than bigger loans; the bank will also stick to the tested joint liability group model. Meanwhile, it is expanding other unsecured loan segments but not beyond five per cent of total loans. “That’s a balanced approach,” says Kathpalia. However, as the share of secured loans such as mortgages and newer launches increases, unsecured loans could command a bigger share in the coming years.
Kathpalia lights up at the mention of the ICC World Cup, for which the bank was the prominent sponsor. “It refreshed our brand and image. The brand vibrancy could be felt in the stadiums,” he says with visible pride. “We reached 1.25 million fans across stadiums and 520 million TV viewers. It was fantastic.” While the sponsorship did spike costs in the December FY24 quarter and may spillover to the March quarter, it was worth pumping the brand recall, he says.
Corporate loans
Asked about the share of corporate loans following the rehaul in the retail business, Kathpalia points out that it commands 45 per cent. The bank’s focus on large corporates revolves around real estate, non-banks where it controls the escrow, logistics, and the education sector. Similarly, the bank is active in the mid- to small-corporate segments, besides the small and medium enterprises (SME) segment. “There’s an opportunity and right to win (in these segments),” he says.
What’s new?
Apart from core banking, IndusInd Bank eyes asset management and retail broking. “We will remain interested in non-capital consuming businesses,” he says, explaining that they are important to wealth management clients. The bank will soon apply for these licences.
Being No 5
With 18–23 per cent annual growth targets, what is its approach to moving up the league tables?
“We will give top quartile results. The bank is poised to participate in the country’s growth story. But to get to top three in terms of assets, I think we are a little far away,” he says candidly. “We have a fiduciary responsibility towards depositors.”
He also makes an interesting distinction about banks being annuity businesses. “They must be seen for the long-term... rather than saying I’m number one or number two. It doesn’t affect me at all.”