Ratnakar Bank finds profits where others fear to tread
Feb 25 2013 , Mumbai
The private equity backed company, whose top ranks are now filled with pros from Wall Street banks, has expanded its business into India's poor, rural areas, a tough market long neglected by the country's financial groups.
That market is showing promise. Ratnakar reported a fivefold increase in net profit to nearly 657 million rupees in its last fiscal year. It aims to nearly double its branches to 200 and to list shares in 2014 or 2015, in what would be the first Indian bank IPO in eight or nine years.
Ratnakar, with roots in rural parts of Maharashtra state, makes about one-third of its loans to farmers, small businesses and low-income consumers - a target base that normally operates outside India's banking system.
"It is interesting that now, finally, they are doing what a bank should be doing: bring surplus money from urban centres and deploy it where it is needed," said Vijay Mahajan, founder of BASIX Group, an Indian microfinance institution.
Mahajan estimates the market opportunity at about $50 billion in revenues for lenders in a country where about half of Indian households do not have bank accounts.
Ratnakar is emerging as an outlier with a profitable model for India's 500 million low-income borrowers. In India, more than two-thirds of bank loans are to companies, and retail banking is largely focussed on families with disposable incomes.
The bank is using the deposits it takes from urban customers and extending loans to rural borrowers, with an eye toward small businesses such as tea stall owners, cobblers and people who typically do not have access to banking services.
In 2010, the 70-year-old bank took a strategic decision to modernise itself and hired professionals, including its CEO, from global banks. A year later, it raised about $130 million from investors including HDFC Ltd, Norwest Venture and Beacon Private Equity.
It is in the process of raising another $55 million and expects to close the deal within a few days, said Rajeev Ahuja, a Citigroup (C.N) veteran who is now Ratnakar's head of strategy.
The bank's rural push follows a government-led initiative meant to encourage lenders to India's outskirts - a plan met with fears that money would be wasted on poor customers and bad loans.
Indeed, Ratnakar faces a tough environment.
"It is still a new bank with a new management team and the operating environment is still challenging, hence we remain cautious," said Karthik Srinivasan, senior vice president at ICRA Ratings.
Dhanlaxmi Bank, a small south Indian lender, went through its own modernisation, only to suffer operating losses. The bank made a big push into major cities and was hit by heavy competition and funding shortages.
By contrast, Ratnakar is targeting tea stall owners and cobblers - businesses historically dependent on loans from family and friends, loan sharks, or microfinance institutions.
Microfinance institutions, or microlenders, tend to have more flexible credit policies but can charge up to 24 percent interest compared with banks that charge 13 to 16 percent. In India, a regulatory backlash due to high interest rates and aggressive collection tactics slowed the development of microlenders, with many going out of business.
That trend opened the door for Ratnakar, and others.
ICICI Bank, India's No. 1 private sector lender, opened 101 so-called "grameen", or rural, branches in regions without banks in December alone, bringing its total to 400.
To fund its loans, Ratnakar pays high deposit rates -- 5.5 percent on savings accounts, compared with 4 percent at most Indian banks, and its total deposit cost averages 8.9 percent, compared with the industry average of 6 percent.
Ratnakar's operating expense of 2.67 percent of average assets is higher than the industry average of 1.7 percent.
"Cost is high, but I don't think costs will always remain high," said Ahuja, Ratnakar's head of strategy. "As we build scale, cost of servicing and acquisition comes down."
Vishwavir Ahuja, Ratnakar's CEO, ran the Indian operations of Bank of America for 27 years. He took over his current role in a 2010 management overhaul that brought in a handful of executives from Wall Street and global banks.
The bank's net interest margin, a key gauge of profitability, stands at 3.58 percent compared with 3.07 percent for ICICI.
Rural banking involves a lot of risk in a country where a majority of the population lacks financial literacy and credit culture has yet to evolve. Poor Internet connectivity in the hinterland along with meagre savings and disposable income in the villages add to the challenges.
Even so, spending in rural India, which accounts for about 68 percent of total households in the country, outpaced that in urban areas between fiscal years 2010 and 2012, the first time in nearly 25 years, according to Crisil Research, indicating these markets could present better opportunities.
For Ratnakar, capitalising on that means thinking small. The bank, for example, lends up to $450 to women deep in Maharashtra state to help them buy cows.
"All banks are seeing this as a great opportunity," said CEO Ahuja.