The credit for creating a mass retail banking culture in India largely goes to

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ICICI Bank which started in 1994 with an aggressive retail foray, challenging public sector banks that enjoyed big branch networks. One of the first things ICICI Bank did was to roll out multi-channel retail banking operations with a plan of setting up 2,000 ATMs in 200 cities rather than be handicapped with just 50 branches that it had set up in select cities.

ICICI Bank then trained its guns on foreign banks to capture the credit card and personal loan market. It overtook Citibank as the largest issuer of credit cards with 3 million cards in 2005. It was the only financial institution that clocked a growth rate of 180-200 per cent in the late 1990s. It achieved that growth by pursuing a strategy to cater to the aspirations of the 200-million strong middle-class Indians who loved the ease with which they got home loans, auto loans, personal loans and credit cards.

This is what Chanda Kochhar, CEO and MD of ICICI Bank, calls retail revolution. “When Narayan Vaghul, founding chairman, thought of a bank, nobody in India had thought of setting up a commercial bank in 50 years. People never envisaged that the retail business would be that large. Retail revolution happened in the mid-2000s and we were ready with our plan and rollout strategy. While others were trying to get on the retail bandwagon and follow the big change that was engulfing India, we were already out there with our services,” says Kochhar.

ICICI Bank is the product of the foresight that KV Kamath, its non-executive chairman, had in the mid-1990s. He made good use of the reforms unfolding in India and the technology to scale up.

“In the late 1990s, we felt that India was at an inflection point with per capita GDP crossing $500. Past experience in southeast Asia showed that when that happens, the aspirations of people and their ability to meet those aspirations through a combination of savings and debt increase, creating a rapidly growing retail credit market. We spotted that opportunity and put in place the framework to capitalise on it. This also helped us rapidly diversify the risk in our own portfolio, which was heavily weighed towards financing of industrial projects," Kamath said in an email response.

In 1996, Kamath became MD & CEO of ICICI. ICICI, then only into industrial finance, had total assets of Rs 23,000 crore. In 1999, it got listed in the New York Stock Exchange, the first Indian entity to go through the American depository receipts (ADR) route.

The ADR listing gave Kamath and his team a new vigour for some inorganic expansion. Between 1997 and 2001, ICICI acquired Shipping Credit and Investment Company of India (SCICI) and ITC Classic Finance, which had strong base in the east and the west. It also acquired Bank of Madura, when ICICI Bank’s revenues stood at Rs 2,500 crore and that of Bank of Madura at Rs 100 crore. Then it acquired Sangli Cooperative Bank in Maharashtra.

For ICICI Bank, inorganic growth continues to be integral to its expansion plan. In 2010, ICICI Bank expanded its footprint by getting Bank of Rajasthan (BOR) to merge with itself.

“Acquisitions were part of our strategy to drive growth,” says executive director and chief financial officer NS Kannan. “Acquisitions helped our retail deposit growth and improved our CASA (current accounts, savings accounts) ratios. Bank of Madura gave us an opportunity to tap southern markets, Sangli Cooperative Bank increased our presence in the west and Bank of Rajasthan spread our presence in the northern and western regions of the country,” says Kannan.

Technology also played a big part. ATMs were supported with call centres and it became the first bank in India to set up a full-fledged internet banking channel. For this, it created a technology subsidiary, ICICI Infotech.

Year 2002 turned out to be a milestone, when the boards of ICICI and ICICI Bank approved the merger of the parent company ICICI and subsidiaries such as ICICI Personal Finance Services and ICICI Capital Services with another subsidiary of the bank. All banking and financial operations of the group merged into one entity.

According to Nachiket Mor, executive director of ICICI Bank until 2007, “We had a lot of internal debate about the way we wanted to grow in 1995-96. We decided that if we had to survive for a long period of time, we would have to focus on retail as there was a huge latent market that was untapped.”

Growth was the mantra, at whatever cost. Aggressive growth, through quick sanctioning procedures, built up bad assets. “The popular perception was that we were focusing on growth without caution. But the fact is that we were able to sustain a growth of 30 per cent over a long duration of time. While growing, we also understood the operational risks to the business,” says Mor.

Kamath decided early that the growth of the bank would be funded from bulk deposits, which sounded reasonable in a low interest regime. Less expensive CASA was at 26-30 per cent of total deposits in early years of the bank. And then towards 2008, bulk deposit rates shot up and liquidity became too tight, forcing it to borrow at high rates from the call money market.

But somewhere the brakes had to be applied on the frenetic pace of growth. By the end of 2007-08, trouble began to build. Bad loans from retail segments such as mortgages, credit cards and personal loans began to show up significantly. Rumours began to spread about ICICI Bank’s financial health. Retail depositors panicked and queued up outside the bank’s ATMs to withdraw cash.

Just after the Lehman Brothers collapsed in 2008, speculation was rife about ICICI Bank’s exposure to the beleaguered investment bank. The stock was battered to a low of Rs 252.75 in March 2009 from a high of Rs 1,465 in January 2008. Kochhar was asked to head crisis management. She, along with the senior management, put in motion an outreach plan to allay fears of investors, depositors and customers. Contrary to public perception, the exposure of the bank to the investment bank was just $81 million.

By the time, when Kamath, 61, handed over the reins to 48-year-old Kochhar in April 2009 to assume the role of non-executive chairman, ICICI Bank’s total assets had grown to Rs 3,80,000 crore, with an annual profit of Rs 3,750 crore. But there was also a lot of fire-fighting that was left to Kochhar. She took over from her mentor Kamath in the most challenging period for the bank. It had a backlog of bad debts and investments in derivatives that forced the bank to borrow at high cost from the call money market, and had to shake off a reputation of a big risk taker.

ICICI Bank has been able to wade out of its problems of bad loans and excessive dependence on bulk deposits by moderating growth. Chaitra Bhat, research analyst at LKP, says, "Over the past two years, ICICI Bank has cleaned its balance sheet, reduced exposure to unsecured retail assets. In the process it has released capital and increased capital adequacy ratio to 19.98 per cent. We believe that NPAs (bad loans) have peaked and expect lower incremental addition to gross NPAs. The bank has also increased provision coverage ratio (PCR) to 73 per cent. What all this means is that the bank has significantly dealt with legacy issues and can now move forward in terms of asset growth."

Now, from a retail-led growth, the bank will have a well-rounded focus with asset book (loan book) that would be 25 per cent international, 35-40 per cent retail, 20 per cent domestic corporate and remaining for agriculture and SMEs.

Deputy vice-president of equity research firm Quant, Nitin Kumar, says the bank expects corporate segment to remain the key driver of loan growth, while CASA will be a major focus in deposits with continued thrust on branch expansion.

“During 2008-09, ICICI Bank faced essentially three challenges. First, we were the most international of Indian banks and hence were perceived to be much more impacted by the global financial crisis than we actually were. Second, the change in the collections scenario in India from late 2007 made it more and more difficult to recover dues on unsecured retail loans. Third, the tight liquidity and high interest rates in 2007-08 required a rebalancing of funding mix with a shift from wholesale deposits to CASA and retail deposits. Any business strategy is based on a set of environmental assumptions and the sudden changes in the environment required us to quickly realign our strategy, which the bank has successfully done over the past two years,” Kamath said.

Kochhar, who managed to steer the bank out of its worst phase, says, “Life is always full of challenges. The positives in growth are larger than the challenges.”

(With inputs from Ravi Ranjan Prasad and Shruti Verma Khare)

manjuab@mydigitalfc.com