Business - India;Lessons from the fall

Govindraj Ethiraj

ICICI Bank has had a history of battling ‘rumours’. More than five years ago, in April 2003, the first round appeared to have germinated in Valsad in Gujarat, triggered in turn by a ‘misleading’ report in a Surat-based daily. ICICI’s top management responded swiftly over a long weekend to make, from my recollection, a somewhat memorable statement for Indian banking: “We are moving chests of money to ensure that no depositor has any problem in accessing cash, particularly in our ATMs.” The depositors were fine.

And yet, a little over a year later, in August 2004, another senior bank official was on record, this time in Hyderabad, refuting rumours that the bank’s financial position was not safe. On 4 March 2008, the minister of state for finance announced in Parliament that ICICI has taken a hit of $264.34 million — or Rs 1,060 crore — through its exposure to US subprime home loans market, as of January 31, 2008.

Early September saw the start of the present clutch of rumours, in some ways more sinister and encompassing a broader set of themes than those doing the rounds in 2003. They ranged from logical accusations that the subprime crisis had caused permanent damage and the bank would go belly-up to somewhat illogical ones like the management was selling its holdings en masse.

What did ICICI do this time? To the best of my knowledge, there were no promises to send out chests of money. The Bank management instead rushed to pacify the stock markets, reeling out capital adequacy numbers and making repeated claims about being subprime-proof. It also got the Reserve Bank to endorse its financial position. It did everything to assuage the fears as I could see, of the owners of its stock, rather than its depositors. I should know, I am a depositor. And I waited to hear from them. I ought to add that I have never faced any problems in all my transactions of eight years, not even faulty ATMs. I might also add in the interest of further disclosure that I owe the bank far more money than it owes me. I recall getting a generally-worded SMS first from a ICICI branch manager and then a general one, on October 9 and 10, saying my deposits were safe. After which followed emails and a rash of newspaper advertisements. As I could gather, the Bank took close to three weeks to realise it had depositors to look out for.

So what has changed in ICICI Bank in the last five years? For one, it’s the stock price itself. When the first set of rumours broke out in 2003, the stock quoted at Rs 130, the second time in 2004, it was around Rs 290. And in January 2008, it was above Rs 1,300, thus setting the upper benchmark. The stock began its current descent from Rs 771 on September 11. And quotes at around Rs 300, below the point when ICICI brass were feverishly scrambling around to tackle the rumours. Most depositors (contrary to investors, many of whom always suspect something amiss) I know genuinely believe K V Kamath & Co are smart, albeit a little over-aggressive, managers who have built a competent institution that has set benchmarks in technology, customer interactivity and service.

The problem is that the ICICI brass, like several other well-performing and intentioned managements across the country, have displayed a distraction by the wonders of the five-year stock market economy, at least going by their recent responses and words, or the lack of them. A stock market-obsessed firm like Infosys Technologies can afford a similar approach to some extent because its business is overseas and its investors are in India. Not so with ICICI which is mostly the other way around.

To be fair, its not just ICICI Bank that has been stock-focussed. Everyone from the finance minister to the commerce minister has been doing precisely that, trying to pacify the stock markets, while I am sure they know that the folks that need pacifying are the FIIs and hedge funds who are on full-on exit mode.

Why does all this matter? For, among other reasons, there is a large constituency of businesses big and small who are now crying for credit. Many business owners (as opposed to managers) I know are more focussed on the survival of their businesses rather than their stock prices — except for a realtor or two who are still screaming blue murder about cartels battering their stock prices. Next step would be to put the blame on the CIA because markets the world over are getting thrashed.

Moreover, this is the time to focus and be seen to be focusing on the real economy rather than the stock market economy. Not to say that the latter is not important but it will take care of itself as it always does. Our analysis about the Indian financial system not being in the same boat as the American one is right. Why then are we reacting like we have America’s problems, where the banking and capital market systems are almost inextricable.

And a final word. If your customers believe you and your products, rumours may affect your business in the short term but they cannot shake your firm. Business history has proved that time and again