KV Kamath, the CEO and managing director of ICICI Bank, is due to step down sometime next year. In the twelve years or so that he has been at the helm of affairs, the bank has more than cashed in on a huge growth opportunity that presented itself as the Indian economy grew stronger. The ICICI brand must be the envy of every banker in the country including State Bank which, many point out, doesn’t really connect with the younger lot — which will soon be the largest earning segment of our population. It’s not surprising that ICICI Bank’s home loan portfolio is bigger than that of State Bank. Before the ICICI stock got a drubbing, its market capitalisation too was higher than that of State Bank. For sure, it’s been a phenomenal success story.
Which is why it was disconcerting to see well-informed people — people aware about how the financial system works — getting nervous about their savings with the bank, when the money market turned really tight a couple of weeks back. The anxiety increased as the stock collapsed 27 per cent one Friday — the market knows something we don’t, they said. Despite numerous appearances on television, the bank’s senior management wasn’t able to reassure too many people. The regulator’s efforts at trying to calm things down were met with scepticism. If everything’s fine, why does the central bank need to speak on behalf of the bank, they asked? If many didn’t actually withdraw money it was because they believed the government would never let the bank fall since that would hurt the financial system too badly and also reflect on their inadequate supervision. Fortunately things settled down. But, for a very brief while, it seemed as though things would get out of control, so willing were people to believe the worst.
At the end of the day, banking is a trust business and if people are unnerved and start worrying that their money might not be safe, then something is not right. Ultimately, the strength of a brand lies in the conviction that depositors must, at all times — and especially in times of a crisis — feel secure. ICICI has done a great job positioning itself as a lender that offers customers a good deal and does it quickly. Perhaps it needs to do something so that its numerous account holders feel their money is safe. While we are sure the bank is well-capitalised and can meet all its obligations, there is nevertheless a need to reassure customers and that cannot be done through damage control. Kamath himself is believed to have said during the recent crisis that ICICI “suffers from the worst perception”. Well, there must be a reason for that and if it is really so, the issue needs to be addressed. There will always be those with mala fide intentions trying to give the bank a bad name — in a competitive environment this cannot be wished away — but the onus rests on the bank to overcome that. It’s not simply that the stock was punished—that may or may not have been the work of a bear cartel—there’s something more to it that makes people feel that things could go wrong.
To make the obvious comparison, HDFC Bank, which started out about the same time as ICICI Bank, may not have the kind of name recall across the country that ICICI does. But in these past three weeks, not once has anyone talked about withdrawing money from HDFC Bank. This speaks volumes for the confidence that depositors have in the bank. The market, of course, has always rewarded HDFC Bank for its tempered approach to lending and consequently cleaner asset portfolio. Never has that attitude seemed more correct than it has now. Centurion Bank, which was merged with HDFC Bank with effect from April this year, came with bagfuls of bad assets but, in spite of that, HDFC Bank’s non-performing loans (NPLs) for both the June and the September quarters haven’t really shot up; it still has the cleanest book in the business.
It’s not that ICICI didn’t do the right thing in chasing assets; it was the obvious thing to do at a time when interest rates were falling and disposable incomes and aspirations were rising. They spotted the opportunity and didn’t die wondering whether it would work. But somewhere along the line, the bank perhaps took it a little too easy, not doing enough due diligence and believing, like many others, that the good times would last forever. This is not to take away from the tremendous job that Kamath has done. Without doubt, he has built an enviable franchise. But there’s something missing. And before he decides to call it a day, he needs to do whatever he can to change this perception. Stepping into his shoes will not be an easy task even for the most competent professional. But unless the “worst perception” is changed, Kamath’s successor will have a hard time.