We don't lend to airlines, realty and power sectors: Shailendra Bhandari, ING Vysya Bank
ING Vysya Bank has returned to investors more than double what the BSE Bankex did since January 2009, the year when Shailendra Bhandari was appointed its chief executive.
ING Vysya Bank has returned to investors more than double what the BSE Bankex did since January 2009, the year when Shailendra Bhandari was appointed its chief executive. Bhandari, who is credited with turning around the directionless Indian unit of the Dutch bank, says he has no magic wand. Just keep away from risk, he says in an interview with ET. Edited excerpts:
You woke up a sleepy bank. What did you do?
I think we had a lot of pent-up momentum. There was a seven-to-eight-year period when we were getting our acts together - brand name, banking footprint, people and technology, call centres, internet platforms, etc. With our business momentum, processes and controls and a small market share, we were confident to say that we will grow faster. We were also keen on quality.
If you look at public sector versus private sector banks, it would seem as if the two were lending to two different universes. We don't lend to airlines, real estate developers or power sector. We don't do project finance at all.
If you are staying away from a big segment, what kind of a bank are you?
We feel either we don't have the expertise and can't understand the risk or the risks are far more than what makes sense to us. We don't believe the risk-adjusted returns make sense. If you are an expert, you may find ways to make money, but we are not experts. So rather than investing to build expertise, there are easier things to do. In Europe, project finance is only done by banks.
It is quite something to have the ability to assess a greenfield project - whether it will see the light of the day, when will the cash flow start, etc, and to look ten years down the line. It's difficult to even hedge the liquidity and interest rate risks on that. Some banks may have the expertise,especially if they come from a background of being development financial institutions.
Are you of the opinion that there's a need to go back to development financial institutions such as former IDBI and ICICI for project finance?
That is one way to do it. I would rather look at the US market, which has nothing to do with institutions, but with capital markets, where you can issue 20- and 30-year bonds. That is what you need. You need pension funds and mutual funds who can invest in that. If you create financial institutions, they will have the same moral hazard. To me, that is not as good as getting a strong debt market.
So where does your growth come from and how do you make money?
On the wholesale side, we lend to large and mid-sized corporates. For large corporates, it is essentially working capital. We leverage the fact that we are not just a mid-sized bank, but also the Indian arm of ING. ING has relationships with some of the biggest companies in India. Also, for any international company coming from Europe, we would be acting, hopefully, as the first and sometimes the only banker in India. Small and medium enterprises sector comprises 31% of my loan book. It is one of the success stories of the marriage of ING and Vysya Bank. Our SME book has been growing at 31%, but our gross NPA is less than 0.5%.
The belief is that during a downturn, SMEs turn out to be the biggest NPAs. Are you an exception?
A lot of banks could do the SME business very well, but in pockets. A particular branch could be doing well because of the branch manager. But the problem is that it's neither replicable nor scalable. So we have a separate SME vertical, which does everything from origination to underwriting. There are two key parts to security - collateral and cash chart. In India, when a bank tells you my loan is secure what they mean is inventories. I call it soft collateral because it has a habit of vanishing overnight. When we lend to SMEs, we look at hard collateral. The fortunes of the entrepreneur and the company in this case are closely intertwined. So we want the mortgage either on the factory, the showroom or the house.
As for the cash chart, in the case of SMEs, the published accounts can be misleading and the accounts never appear to be making profits. They also come late. And if something goes wrong, it goes into a default. So you want to be the sole banker and want to see cash flows passing through you. If you can do this, you will know beforehand if he is in trouble.
In terms of retail loans, you pulled back from auto loans and personal loans? Aren't you missing out on the retail boom?
For us, SME is part of the retail portfolio. But excluding it, consumer finance is 20% of the loan book. Traditionally, we were never into consumer finance. We started quite late in 2006. And then we had a bad experience in all the areas of consumer finance. We discontinued it after 2009, except for mortgages. After I joined I thought, let's step back and review it as to what went wrong.
So what went wrong?
Before any bank enters consumer finance, it needs to have a credit policy in place. Then, you need a separate underwriting team... and a collection team. The problem with auto loans was that the financier had to be in the showroom. You need to invest a huge amount in dealers' infrastructure and fight for market share. There are huge entry barriers there. In hindsight, we may have been a little extra conservative.
Does Indian economy need new banks? What will somebody new coming with Rs 500 crore or Rs 1,000 crore capital do that you are not doing already?
I believe in free markets. So if somebody who is of repute and is willing to do it, it should go ahead and do it. But can someone come in, open ten branches and fill a burning hole? I don't think he can.