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ICICI's race against itself

Borrowing from dot-com-era strategies, Kundapur Vaman Kamath gave his bank a head start in tapping India's fledgling consumer markets. Critics say he's running too fast -- but the country's No. 1 consumer banker vows he's not slowing down.

Near the height of the Internet craze in 1999, Kundapur Vaman Kamath, head of India's second-biggest lender, ICICI Bank, attended a McKinsey & Co. technology workshop for financial executives in New York City. The consultants' message, he says, was simple: Any company with a brand name, technological prowess and top-notch execution skills could become a serious banking competitor. Think Microsoft Corp., they said.

"The Internet posed a threat that nobody in banking fully understood," says Kamath. He had reason to be alarmed. His stodgy $14 billion-in-assets institution was in the midst of a leisurely transition from public finance and corporate lending house to consumer bank. Kamath allows that by the time he jetted back to Bombay a few days later, he had become "a paranoid man."

Kamath decided to adopt the tactics of his putative enemy, a Silicon Valley­type start-up. He made high speed a core ICICI priority -- alongside financial power, technological excellence and a bright, well-motivated staff. Every new product, he told employees, had to get to market within 90 days of conception. Workers were to assume that a couple

dozen rivals were working 24/7 on the same idea. Kamath quickly found a test case. The ICICI chief gave his staff 90 days to get a long-planned online trading platform up and running. "They said, 'We don't know what this 90-day turnaround concept is,'" he recalls. "I said, 'Go and find out. I want it done in 90 days.'"

It was.

In the five years since, Kamath has transformed ICICI into the kind of dynamic, technology-driven banking competitor he feared might destroy it. To begin with, he spent nearly $200 million to build the fastest and most flexible technology platform of any bank in India. The unconventional system, which eschews mainframes and operates without a chief technology officer, can handle the needs of millions of individual customers from the town of Nagercoil, on India's southernmost tip, to the northern city of Amritsar and allows branches to share centralized data. He abolished bankers' hours, keeping branches open from 8:00 a.m. till 8:00 p.m., even as rival state banks maintained their traditional 10:00 a.m. to 2:00 p.m. schedule. He hired dashing Bollywood film star Amitabh Bachchan, India's version of Sean Connery, as ICICI's brand ambassador to establish its name quickly with consumers. And the bank began to launch new products with all-out promotional blitzes that sought dramatic market share gains, sometimes at the expense of immediate profit. When ICICI executives realized they couldn't acquire or build branches fast enough to reach their distribution goals, they pursued outside-the-box solutions.

"We decided we would have to change the meaning of distribution. We said, 'Let's say distribution means electronic channels and agents who go out to the customer,'" says consumer banking head Chanda Kochhar. ICICI ATMs soon became ubiquitous in India.

Kamath's paranoia has translated into a huge corporate success., the unit he rushed into existence five years ago, now accounts for 60 percent of the country's online equity trading volume. ICICI's so-called mass affluent customer base has grown from 100,000 to a phenomenal 10 million, while its assets have grown to $29 billion. Last year the lender, India's second-biggest bank and its biggest private institution, provided an astonishing 30 percent of new retail credit in India. ICICI ranks as the country's top mortgage lender, and its insurance joint venture ICICI Prudential Life Insurance Co. has a whopping 35 percent market share, more than twice that of its biggest rival, joint venture Tata AIG Life.

Withal, it's a very profitable bank. In the fiscal year ended last March, ICICI's annual aftertax profit surged 35.7 percent, to $356.6 million; for the six months through September, income leapt 18.1 percent over the same period a year earlier, to $190 million,. Its share price (ICICI offered American depositary receipts on the New York Stock Exchange in 2000) has increased 13-fold in the past five years, and the bank, which sports an excellent 21.9 percent return on equity, has become a favorite of foreign investors.

"We're pretty bullish on India, and ICICI stands out," says Singapore-based investment manager Andrew Gillan of $38 billion-in-assets Aberdeen Asset Management, which owns stock in the bank. "It has a dominant market position, it has a great distribution network, and it's a play on a developing economy."

ICICI had the good fortune to be the first mover into what Kamath concedes was a "sweet spot." Beginning in the early 1990s under then­prime minister P.V. Narasimha Rao and Finance minister (now prime minister) Manmohan Singh, India gradually opened its economy to competition and encouraged faster growth. The country soon reaped the benefits, nudged along by developed nations' interest in outsourcing technology-driven back-office functions to cheaper markets. Indian GDP growth has averaged 5.5 percent per year since 1999, helping to create a whole new consumer class. GDP per capita rose from $1,800 in 1999 to $2,900 in 2003, and such sectors as housing have taken off as interest rates on residential mortgages have fallen by half.

Yet critics at rival banks, none of whom would agree to be quoted by name, think that Kamath's damn-the-torpedoes approach carries big risks, not least its concentration of credit. More than half of ICICI's loan portfolio, by far the largest percentage exposure in the country, relies on India's fledgling consumer society. In markets such as auto and motorcycle finance, the bank is providing more than 35 percent of all credit. Competitors assert that ICICI has sacrificed credit quality for market share, won with dangerously low pricing. Once the credit cycle starts to turn, warns one rival, "You go too far out and you don't know what hits you."

Indeed, the bank has been forced to fight off nasty speculation. In April 2003, ICICI had to contend with an incorrect local newspaper article in the western town of Valsad that raised questions about the bank's liquidity. The story, spread by mobile phone text messages, panicked customers, who began emptying local ATMs. Within hours depositors all over the state of Gujarat -- and even as far away as Bombay -- had begun to make withdrawals. It took 24 hours and assurances from ICICI and the country's central bank, the Reserve Bank of India, to halt the run. "We had to move $1 billion in cash over 10,000 kilometers in the space of a few hours," Kamath recalls.

Kamath and ICICI's management team argue that they impose exacting risk controls to guard against bad loans, which currently total a very manageable 2.7 percent. What's more, they say, ICICI can choose from literally millions of creditworthy borrowers because consumer finance is still so new in India. The Valsad incident, however, was a reminder of just how quickly depositor worries -- even ill-founded ones -- can turn into a crisis.

Yet if anything, Kamath, a Formula One racing fan, is putting his foot on the gas even harder as India's economy enters what most analysts expect will be a prolonged boom. He wants ICICI's consumer lending, which currently accounts for 56 percent of the bank's loans, to expand to about 67 percent; he plans to boost his 15,000-person staff -- up from 600 four years ago -- to 19,000 in the next year, while building another 60 branches, taking the number of outlets from just 80 five years ago to 600. The ICICI chief even has his eye on an overseas expedition: He wants the bank to reel in a big share of the billions of dollars in remittances from the millions of Indian citizens who work abroad.

All this is adding up to "a big gamble," says one of the skeptics. "Kamath may be right that volumes will take care of his risk. But if he is wrong, he has bet the bank."

Kamath and his many supporters say the stakes aren't nearly that high. "ICICI is one of the most aggressive players in the retail segment; some say excessively aggressive," explains Sunil Garg, Hong Kong­based head of Asian banking research for investment bank Fox-Pitt, Kelton (Asia). But, he adds: "I wouldn't say it's 'betting the bank.' It's got reasonable capital strength to withstand any downturns." More critical, says Garg, is whether India's biggest consumer bank can sustain its recent pace of growth. "And that," he says, "is probably the case."

KAMATH'S BANK WAS ANYTHING BUT A FIRST mover for most of its 49-year history. Begun as a joint initiative of the World Bank Group, the Indian government and local businesses, the Industrial Credit & Investment Corp. of India was a lumbering project and corporate finance house designed to dispense medium- and long-term credit to state-owned and private enterprises. In India's state-dominated economy, there was little need to compete vigorously for lending business. Government-run banks made more than 90 percent of all loans (they still account for 74 percent), and the central bank determined interest rates. Even a decade ago ICICI "loan officers still sat at their desks while queues of corporations came to them because it was the only place they could get credit," recalls deputy managing director Kalpana Morparia.

Consumer banking barely existed in impoverished India before Kamath's big push in the late 1990s. Foreign institutions like Standard Chartered Bank, Citibank and HSBC Holdings catered to a tiny elite of well-heeled locals by offering credit cards and wealth management services. Middle-class Indians typically kept their savings at such state-run lenders as State Bank of India -- still the biggest of the country's 283 banks, with $89 billion in assets -- that offered basic checking accounts and low-yielding savings plans.

In the early 1990s, however, the government permitted a modest liberalization of Indian banking, allowing local institutions to broaden their retail offerings. In 1994, ICICI created ICICI Bank as a subsidiary to lend to consumers. (It wasn't until 2001 that the Reserve Bank permitted universal banking charters. When it did, ICICI Bank engaged in a reverse takeover of its parent, ICICI, so that it could offer corporate and consumer services.)

When he joined the bank 33 years ago, Kamath didn't seem likely to challenge India's cautious, constrained banking system. He was born into an upper-middle-class family in the quaint southern city of Mangalore on India's west coast. His father, Vishwanath, was a chemical engineer with a British MBA who founded his own business making roof tiles and served as Mangalore's council president for two decades. The younger Kamath graduated in 1969 with a degree in mechanical engineering from the Karnataka Regional Engineering College and earned an MBA at the prestigious Indian Institute of Management in Ahmedabad. He joined the project finance division of the old development bank ICICI in 1971 and worked there for 12 years evaluating and lending to infrastructure projects.

But Kamath also showed an aptitude for leading new initiatives. In 1983 he started ICICI's leasing division, which he ran for two years. During that time he began to install computers in his department to help staffers make business decisions. Other departments followed his lead, and ICICI became the first Indian bank to use computers for data processing. By then Kamath had caught the eye of then­nonexecutive chairman Narayan Vaghul, who on becoming chairman and CEO in 1985 selected him to oversee his strategy team. The team's brief was to evaluate the long-term prospects of ICICI's business model. Kamath came back with "a very classic note in which he articulated that development banking was clearly unsustainable and that we needed to move out," Vaghul recalls.

Kamath spearheaded many of ICICI's early attempts at diversification. He helped draw up the plan for ICICI's venture capital group in 1987, the country's first. A year later he was one of the creators of Credit Rating Information Services of India, the country's inaugural credit rating company, in which ICICI still owns a stake.

Kamath gained a reputation not only as an innovator but as a stickler for detail. Senior executives say they have seen the usually even-tempered, well-liked Kamath become upset by a speck of dust on the boardroom carpet and get infuriated with bank officers who keep guests waiting in the lobby. "If he sees dirt anywhere in the bank, he'll pick it up and put it in his pocket," says one senior executive.

In 1989, Kamath was given leave by ICICI to work for the Asian Development Bank. Vaghul, however, had been so impressed that he told Kamath before his departure that he wanted him to be his successor. "Kamath seemed to tower over everybody else," says Vaghul. At ADB, Kamath was involved in financing infrastructure projects in China, Indonesia, the Philippines and Vietnam. This regional experience convinced him that India's middle class had reached "an inflection point" -- many development experts define this as more than $500 a year in per-capita income -- and was ready to embrace a broader array of consumer banking services.

Seven years later Kamath returned to ICICI, and Vaghul, who had made some tentative forays into a few consumer markets such as asset management as the government liberalized its banking markets, kept his promise. He ceded his CEO title to Kamath, though he remains chairman.

KAMATH KNEW HE WANTED TO create a consumer bank and spent a big part of the next two years planning his attack. His vision of a more diverse, consumer-focused bank wasn't universally supported. A consulting firm Kamath hired actually campaigned against him, arguing to board members that ICICI didn't "have the culture to go into retail banking," Vaghul recalls. What's more, some directors thought Kamath's proposal to build a huge, technology-driven distribution system was too risky, says the chairman. But in 1999, Kamath secured ICICI board approval for his plan to ramp up the bank's consumer business by opening up new distribution channels and launching new products such as electronic stockbroking and insurance -- all at prices India's expanding middle class could afford.

"The view that we very consciously took was that we cannot be very selective in acquiring customers, because we are just at the stage of building the customer base," says consumer banking head Kochhar. "We had to cast our net wide."

Kochhar and her colleagues began trolling for India's mass affluent, defined by McKinsey consultants as the roughly 40 million Indian households with annual incomes ranging from $2,500 to $16,000. These levels were too low to interest foreign banks, such as Standard Chartered, HSBC and Citibank, which tend to focus on the roughly 4 million households whose annual take exceeds that.

Kamath's pioneering efforts seemed downright bizarre to many rivals. The bank rolled out ATMs in high-traffic urban areas and hired thousands of sales agents to make house calls to potential customers. "Everybody was laughing," recalls ICICI products and technology group head Madhabi Puri Buch. Their misperception, she says, was that "if there's no branch, customers don't come."

Kamath and his team were indeed undertaking a revolutionary effort in India's staid banking marketplace. Even today local giant SBI, with $89 billion in assets, doesn't offer personal or auto loans. Most other state-run lenders remain marginal players in mortgage loans, auto finance and credit cards.

"ICICI was in fact instrumental in transforming the banking scene in India," says Vaghul. "The main triggers for this transformation came from technology, and second was Kamath's leadership, which was very bold, courageous and pragmatic at the same time."

To get the word out, Kamath in late 2000 hired Bachchan, the man known as "the king of Indian cinema," who has appeared in more than 100 films. (He is the only Indian actor with a wax likeness at Madame Tussauds in London.) For the next two years, Bachchan put his graying good looks, baritone voice and trusted image to work in his new role as ICICI's brand ambassador. His message -- that it was "safer, simpler and smarter to transact with ICICI than other banks," as Kochhar puts it -- connected: The bank today is the only financial services company among the country's top ten most recognized brands.

ICICI pioneered other aggressive marketing firsts, not least installing ATMs in gas stations on heavily traveled roads; there they could reach a self-selected group of relatively well-to-do Indians, car owners. "On these main arterial roads in all the major cities across the country, suddenly, over one to two years, we were everywhere," says Buch. "You just turned around and you saw ICICI." In all the bank has set up 1,790 ATMs in the past five years.

Rivals in areas like the fledgling private insurance market found themselves outgunned. They offered a single type of policy, which they sold through one channel, says Shikha Sharma, who runs ICICI Prudential, the bank's successful four-year-old insurance and asset-management joint venture with the U.K.'s Prudential. By contrast, ICICI Prudential launched multiple products, such as endowment and unit-linked policies as well as pension plans, and sold them through agents, online venues, bank and insurance branches and bancassurance arrangements with ten other banks.

The bank has found innovative ways to reach customers in each new market. It was the first lender to offer an adjustable-rate mortgage pegged to a popular local floating rate; it used its corporate relationships with local carmakers to get them to offer its auto loans to customers; and it has segmented the bank deposit market with different products ranging from ICICISelect, for high-net-worth clients, to Kid-e-bank, for children's accounts. Another key product enhancement: Its stockbroking service was the first to allow customers to make automatic withdrawals from their bank accounts to purchase shares or to automatically deposit the proceeds from sales.

The result of this unprecedented drive was a more-than-sevenfold increase in deposits, from $2.19 billion in March 2000 to $15.6 billion by the end of September 2004.

To process the growth, Kamath has built "back-office factories" in Hitec City, an infotech park in Hyderabad, and Bombay, employing 1,500 workers to screen and process loan applications. He has also added 1,700 customer relations reps who work at these centers handling inquiries and problems. These reps can dispatch agents -- the company has 12,000 of them on commission -- to a potential customer's home to provide whatever explanation or other help is needed about any retail product.

Corporate lending, once nearly 100 percent of ICICI's business, now makes up 44 percent of its portfolio. The remaining, consumer portion breaks down into more than a half dozen categories: Mortgages account for 51 percent of the retail loan portfolio; auto loans, 20 percent; commercial lending, 13 percent; and motorcycles, credit cards and personal loans about 3 percent each. The remaining 7 percent is spread among a variety of miscellaneous others (insurance is part of a separate joint venture).

UNDERLYING ALL OF THESE BUSINESS OUTREACH efforts is a technology strategy that aims for maximum flexibility at a minimum cost. Because ICICI's average customer balance is $2,500 -- Kamath estimates that is the equivalent of at least $15,000 at a bank in the West -- he says that his tech costs must be a fraction of a global bank's or his strategy will fail.

Kamath doesn't buy the notion that mainframe computers become much more cost-competitive as the number of transactions rises. "I can run a 10-million-customer base, and I believe I can run a 20-million-customer base off a nonmainframe environment," he says, adding that "the biggest fallacy in banking" is that mainframes offer more economies of scale than smaller systems.

ICICI's computer hardware and software network is thus decentralized to promote price competition among vendors. Kamath says that by eschewing a more costly centralized mainframe setup that relies heavily on one or two big suppliers, he keeps control in his hands. His team of six senior technology specialists -- he doesn't have a CTO because he believes individual business units should decide on their own needs -- is therefore able to work to negotiate the best terms possible from suppliers when enhancing systems. "All competitors are welcome. We are not wed to anybody, so we have the ability to move vendors, not they the ability to tell me what to do," says Kamath.

At the same time, ICICI is able to wring out more savings than its global bank rivals because they generally have to plug into their parent companies' overseas data centers, which have much higher labor costs than ICICI's in India. Kamath says that ICICI has compared its technology costs with those of big international banks and is confident that its operating expenses per customer are just 5 to 10 percent of what foreign banks in India spend. (A foreign banker concedes that ICICI has lower costs but estimates that the figure is closer to 25 to 30 percent lower. If it were 90 to 95 percent lower, says the banker, "we would outsource to them!")

ICICI's system strives to be as customer-friendly as possible. Technology head Buch says it is common for the bank to have as many as 60 different adapters and converters installed so that corporate customers can plug in as quickly as possible. She says she routinely tells clients, "You tell your tech guys that no matter what it takes, I will find a translator or converter or adapter so you can talk to my computer."

Where ICICI has been most successful is in persuading consumers to use its technology. In a near reversal of typical U.S., European and Indian banking habits, less than 30 percent of ICICI's 10 million customers conduct their business at branches; the rest use electronic means -- ATMs, mobile phones and the Internet -- which translates to a huge savings in overhead.

ICICI'S AGGRESSIVE TACTICS DON'T ALWAYS SIT well with competitors, one of whom scoffs at Kamath's "land-grab strategy." Says an officer at another local bank, "Their philosophy is, 'The market is available, so let's take the lot.'" These critics claim that ICICI has lowballed some of its pricing to win a commanding share at the cost of profit, a move it may someday regret.

"In a country without a credit bureau -- which means you cannot properly assess your customers' creditworthiness -- you cannot grow at this pace without the risk of a blowup," says another competitor. What's more, he says, it's not necessary in a market growing so fast. "If I can grow at 40 percent to 50 percent a year with the types of customers who will be profitable and buy multiple products from me and still have a good risk profile, why should I test the margin?"

Competitors point to ICICI's relatively low net interest margin as evidence that it is pushing too hard. In fiscal 2004, ended last March, ICICI's net interest margin stood at 1.9 percent, compared with local rival HDFC Bank's 3.7 percent and SBI's 3 percent. The average among India's seven biggest state-owned banks is 3.4 percent, according to J.P. Morgan India and Fitch Ratings. Standard Chartered's local unit enjoys a 5.4 percent margin.

But ICICI executives contend that they aren't taking big credit risks. One of the positive by-products of being a first mover in a new market like credit cards, says Buch, is that there are millions of creditworthy consumers who don't have cards. "We are nowhere near lending to people who will find it hard in the event of a recession." What's more, ICICI uses a customized version of the credit-scoring model devised by Minneapolis's Fair Isaac Corp., which works with eight of the ten biggest card issuers in the world. Because ICICI, unlike some of its competitors, maintains centralized control over local branch lending decisions, says chief financial officer N.S. Kannan, it can react quickly if it sees a problem developing in one area. Diversification also helps. Kannan forecasts that the bank's net interest margin, which actually rose last year from 1.4 percent the year before, will hit 2.75 percent in the final quarter of this fiscal year.

For now, at least, analysts tend to side with ICICI. The bank's nonperforming loan rate of 0.8 percent of total housing loans at the end of March was on a par with the best in the industry, according to Fitch Ratings' figures. It's also well below that of SBI, which had a 2.5 percent bad housing loan ratio, according to a recent report by Mahrukh Adajania, a Bombay-based banking analyst at UBS Securities India. In her study, Adajania estimated ICICI's gross NPL rate for all retail loans at 2 percent, which she viewed as manageable.

In any event, ICICI's consumer strategy is changing. With 10 million customers and a 30 percent share in most of its target markets, the bank "has built a strong foundation," says Kamath. Now it is shifting its attention to individual account profitability. Last year, for instance, ICICI began charging a fee to customers who don't maintain certain minimum balances, and Kamath is urging his staff to cross-sell more life insurance, mutual funds, mortgages and auto loans to existing customers, which will raise margins.

The bank is also starting to look abroad to seize some of the opportunities afforded by India's huge expatriate population. Late last year, it opened small offices in Canada, China, Singapore, the U.K. and the United Arab Emirates. More expansion is planned this year as ICICI hopes to process as much as 30 percent of the $20 billion in annual remittances into India from 20 million nonresident Indians living around the world.

Still, the bank's best growth prospects remain in its home market. Consider that only 11 million credit cards have been issued in India, a country with about 260 million bank depositors. Consultants at McKinsey expect at least 35 million cards to be in circulation by 2010.

Today, Kamath's most feared competition for this business isn't some local version of Microsoft. It's the foreign banks. They recognize that "they must be in China and India" to grow, he says. And, in late October, Finance Minister P. Chidambaram announced that foreigners would be able to acquire up to 10 percent of any local lender per year going forward and that they would be able to obtain control of that Indian institution over three or four years.

There aren't many big targets available. Besides ICICI, only five local banks have more than $15 billion in assets. As formidable as they are, "almost all foreign banks will have to start with no balance sheets in India," says Kamath, who professes no interest in selling out. With limited opportunities to make a transforming acquisition, the foreigners, Kamath says, face "a different ball game."

In fact, he says, "I was paranoid a few years ago, but we have created a foundation now. I was small then, and I was not sure about the landscape ahead. Now we have scale, we have significant market share, we are the established player."