Seasonal Magazine met Shyam Srinivasan, Managing Director and Chief Executive Officer of Federal Bank Ltd (BSE: 500469 | NSE: FEDERALBNK) for an exclusive interview, to discover the upcoming strategic initiatives of the private sector lender. His plans include being highly proactive in developing the SME business further, innovating on the bank’s already competitive digital initiatives, and betting big on incubating startups. Federal Bank is scheduled to announce its Q1 FY’2017 results on July 22nd.
“We cannot solve our problems with the same thinking we used when we created them,” wrote Albert Einstein wryly more than six decades back, and nowhere is it more relevant today than in the plight the world economy finds itself in.
The run-up to the global financial crisis of 2008-09 was accompanied by one of the largest and simultaneous bull runs in real estate, housing, commodities, and stocks, driven by easy liquidity of money triggered by various Central Banks as well as the sophisticated but risky debt products by some of the world’s largest private financial conglomerates, to capitalize on it.
Post the crisis too, the economic and financial brains that allowed this crisis, if not caused it, had only one solution that Einstein mocked – which was the same solution that caused the problem, more liquidity.
Today after rounds after rounds of Quantitative Easing by all the Central Banks in the developed nations to contain the crisis in the short-term, the world is staring at not just sluggish growth, but a phenomenon never seen before - $13 trillion government bonds yielding negative returns, which the Central Bankers don’t know how to manage.
India too was not spared the pain, and the global financial crisis reared its ugly head in the country as not just sluggish growth across the capital-intensive sectors, but by hitting the banking sector with its worst ever Non Performing Assets crisis driven by a rout in real estate, commodities, and overall demand.
Thankfully for India, later into the crisis, in late 2013, a top-ranking economist rather than a bureaucrat was called in to head its Central Bank. Dr. Raghuram Rajan had the additional credential of warning about the world economic crisis in 2005 itself.
But time proved that the former Chief Economist of IMF too didn’t have any magic wand. There were no easy solutions, only painful and protracted ones like Einstein had predicted. Dr. Rajan was at least smart enough to realize that.
In late 2015, RBI announced the Asset Quality Review (AQR), and banks in both the public and private sectors utilized the mechanism to comply with the accelerated NPA recognition norms, which resulted in significantly more NPAs in the system getting recognized.
$35 billion of new bad loans were recognized across Indian banks, pushing gross bad loans to 7.6% from the earlier 5.1%. As per some estimates, the Indian banking sector is saddled with $120 billion of sour loans, and overall stressed assets (also counting restructured assets) is estimated now at 11.5%.
The fresh NPA recognitions and the resultant provisioning have affected bottomlines across the public and private sector, and Federal Bank too was no exception.
Thankfully for Federal Bank, just two years after the global financial crisis unfolded, in September of 2010, the shareholders led by its Board had decided to bring in a thorough banking professional with worldwide exposure, to lead the bank.
At the time of joining, Shyam Srinivasan had two decades of experience in MNC banks, which included serving on Standard Chartered Bank's Global Executive Forum, comprising of its Top 100 Executives worldwide. He is an alumnus of IIM Kolkata and NIT Tiruchirapally, and has done a Leadership Development Program from the London Business School.
Soon into his job, Shyam Srinivasan's touch was most evident in the under-writing quality at every stage right from credit selection, which was based on his deep understanding of how the NPA crisis would evolve in the years to come.
Leveraging his global exposure in customer-centric banking policies, as well in the required work culture improvement for achieving it, Federal Bank has come a long way since 2010, improving its presence and visibility across the nation and its diaspora worldwide.
By fiscal 2015, his prudent policies had helped the traditional private sector bank to grow its net profit from Rs. 440 crores in FY’10 to Rs. 1012 crores in FY’15, which was a growth of over 130% within 5 years. Needless to say, it was far better a performance than many of its comparable peers, and all the more impressive as it was achieved during a tumultuous period for Indian banking.
However, the impact of RBI mandated AQR has not spared any bank, and it shows in Federal Bank’s FY’16 numbers too.
However, what comes across as impressive when we met Shyam Srinivasan for this interview is what Einstein had predicted. This CEO doesn’t believe that old solutions can solve the new crisis facing Indian banks, and he is not looking for new solutions either; rather he and his team are half-way into implementing them.
Firstly, ever since he joined, and especially after realizing that the economic recovery would take longer than expected, Shyam Srinivasan had prevented the bank from growing any kind of risky credits. While this may have affected the credit growth, and even inflated the NPA ratio, at the end of the day he knew that only the quantum of the NPAs will matter.
Secondly, this CEO has identified one of Federal Bank’s traditional strengths – SME business – and overhauled it entirely to address the new realities of today. The result is that from the earlier model of ‘SME coming to the bank’, the new model is ‘bank coming to the SME’.
Due to their mounting bad loans, PSU banks have been slowing down on SME financing, and this has put Federal Bank in a sweet spot to address this burgeoning market, many segments of which are unaffected by the global slowdown.
Thirdly, Shyam Srinivasan has rightly identified digital as the new means to compete with even players multi-times his size. According to him, digital is democratic and once again provides a level playing field for smaller banks.
Federal Bank has constituted a digital team of hand-picked talents, and pioneered several products that have caught the nation’s attention like paperless selfie accounts, missed call phone recharges, and one of the best smartphone banking apps around. While selfie account has been copied by larger banks since then, the missed call recharge product helped many who were stranded during Chennai floods.
Next in line comes this CEO’s hunger to widen a business in which Federal Bank has always been a leader – overseas remittances. Here also, his approach of creative solution, is visible, with Federal Bank more bullish on growing remittances from South East Asian markets like Singapore & Malaysia, than pursuing further growth from traditional stronghold Middle East or reluctant markets for India-remittances like North America & Europe.
Perhaps the most visible of all steps that Shyam Srinivasan has undertaken at Federal Bank has been a vastly improved work culture that has resulted in one of the best customer experiences in the sector. He has made the workforce constitution younger and cosmopolitan as well as trained them to put customers’ needs first.
But overwhelming all these initiatives in future potential has been one of Shyam Srinivasan’s most passionate initiatives – incubating startups, and this is where he comes closest to Einstein’s solution framework as possible.
Federal Bank has pioneered the concept of dedicated branches for startups, branded as ‘Launchpad’. But more than a dedicated branch, Launchpad is an array of products and services through which Federal Bank will provide credit support, equity participation, and financial planning support to startups. Already, high-profile startups like 4TiGO, which is an Uber for trucks, have been assisted by Federal Bank.
To come out of the current crisis in banking, this CEO realizes that out-of-the-box thinking is essential, and what best way than to support budding and passionate entrepreneurs when they need that help the most! He confides in us his vision, when he says that many of today’s startups are going to define a new sector in the future, which he calls ‘service sector SMEs’.
Seasonal Magazine in conversation with Shyam Srinivasan, Managing Director and Chief Executive Officer of Federal Bank:
A couple of years back, the NPA problem in the system was underestimated, but after much firefighting, as of now, do you think that the problem is getting overestimated by many observers?
I think there was no serious underestimation back then, nor overestimation now. When such client payment stress starts initially, I agree that there is always a denial tendency, and same might have happened. Anyway, as of now, post the Asset Quality Review, there is no overestimation and what we now have is better recognition or I would say a realistic estimation of the NPA problem. One issue with NPA is that it is a ratio, a numerator divided by a denominator, and even the denominator shrinking, i.e. credit growth slowing, can cause NPA to be amplified. So one has to look at the quantum of non-performing assets and not just at the ratio, and I feel that the quantum of NPA in the system is coming under control. Even a major player like SBI is now saying that the worst is over for them.
With regard to Federal Bank specifically, how are you positioned to tackle the NPA problem, further?
For the last 4-5 years, Federal Bank has seen no dramatic growth in risky credit, and it was a conscious decision. Due to that cautious stance, now we are better placed. We are confidently poised for quality growth.
In which all sectors are Federal Bank’s thrust on credit growth happening currently? How bullish you are on the SME sector, as there are reports that many banks are closing the taps on SMEs?
SME credit has been our bread n’ butter business for many years now. There are many ways to classify SMEs, like by revenue, or by captive markets, or export-oriented model, or size of exposure, and such criteria. By revenue, we consider an exposure of Rs. 25 crore or less as an SME client. Captive SMEs to large upstream manufacturers, catering to local demand are in good shape, according to our assessment. Downturn has happened in specific sectors like steel, infra, mining, and textiles. Our bias is towards captive and local SMEs. To better address them we have sharpened our distribution, and our strategy is to go ‘mile-deep’ rather than ‘inch-deep’ in local markets. Our officers comb such markets completely by leveraging local capabilities and we are always trying to address the whole ecosystem around a company. Earlier, SMEs were required to come to the bank, but now the bank is going to the SMEs.
Your restructured book has been contained to a great degree in recent quarters, and your asset quality has become stable. Do you see it improving significantly from here, or will it require more time?
There are two dimensions to this, one what is in our control and the other which is not in our control. As I told you, over the past few years, we were extremely cautious with regard to risky credit, and due to that we have made meaningful progress in asset quality and this momentum will continue. But that which is not in our control is with regard to the economy, whether the economic recovery will sustain and improve in the quarters and years to come.
You have recently launched dedicated branches for start-ups. How has been the start-up ecosystem’s response to this initiative?
Good that you asked this question, as this is the topic on which I can keep talking for 100 days! The response to our initiative has been tremendous. Every day we have 3 to 5 new proposals coming from startups. All want to succeed, and their energy is infectious. I think this is a revolution that is happening among our youngsters. From job-seekers they want to be entrepreneurs, job creators. I am surprised by their mindset which is fresh, and their attitude which is solution-oriented. Our Launchpad branches and initiatives for startups perfectly complement their energy and enthusiasm. Firstly, as a lender, we are open to extend them credit. Secondly, in promising startups we are open to provide equity support. Thirdly, whenever possible, we are sourcing some of their tech products for our own use. And lastly, and this is the most important, we are considering them as future SMEs. Until now SME sector has been dominated by manufacturing. But many of these startups are going to create a new category, which I call the service sector SMEs.
Can you mention some specific startups that are assisted by Federal Bank?
Well, there are quite a few of them, and even today two youngsters had walked in to share their startup idea and I see much promise in it. Another point I want to stress is that startups are not attempted by only youngsters, but by professionals in their mid-career or even later. Federal Bank is the banking partner for one such startup, 4TiGO, which is an Uber for trucks. It is promoted by Anjani Mandal and Vivek Malhotra, with IIT / IIM backgrounds and having over 25 years of experience in leading IT companies. They are supported by Indian Oil and have also won funding from Infosys co-founder Nandan Nilekani.
Digital has been an area where Federal Bank has been quite bullish, and some of your tools like missed-call recharges and selfie accounts have grabbed national attention. Where do you see the digitial initiatives leading the bank?
Before answering you, I will share what Dr. Raghuram Rajan spoke in a meeting after being shown our various digital initiatives. He opened his speech saying that, “I have seen the future of banking at Federal Bank.” For a person with his caliber and exposure to international banking, to say that, is not easy. At Federal Bank, we are confident that our digital offerings are second to none in the Indian banking industry. Normally, it is not easy for a customer with a large bank to switch to a much smaller bank. But digital is changing that. Digital is very democratic, is killing the brand bias, and is boundary-less. If our digital is better, there is a reason to switch, and this strategy is delivering for us. We have constituted a dedicated digital team to innovate continuously in this realm.
But don’t you think some of the bank’s digital policies like a 24-hour wait period for allowing a new beneficiary or payee, is still very constrictive?
It is not a tech issue, but a policy issue. We can any day change this policy. Anyway, this is another dimension of the digital revolution, which is the potential for cyber fraud. We don’t want to expose our customers to that possibility. But I agree that a 24-hour wait period is constrictive. We have already changed that, and are now planning to offer three modes of security – like aggressive, moderate, and light – which the customer can choose for a specific time period like a day or a week. For example, if a customer has to make a lot of smaller payments during a specific week, he can switch to the ‘aggressive’ mode, and later return to the more secure ‘moderate’ mode.
The bank has forayed into South East Asia, and what would be your broad strategy over there? Will your target customers be largely NRIs there?
Yes, and I will explain why. Federal Bank has a unique position in the remittance-from-overseas business. Around 12.5% of all remittances to India come through Federal Bank. If you analyze the annual global remittances into India by NRIs, there are several large chunks to it. One is the Middle East to Kerala remittance, where we naturally dominate. Another is the ‘Rest of World’ to ‘Rest of India’, which is a large chunk, where we are only a small player. In this too, there are several markets like North America and Europe which fares lower for remittances from NRIs, as they tend not to come back to India permanently but opt for citizenships there. Hence, our next focus is naturally South East Asian countries like Singapore, Malaysia, Thailand etc. We have tied up with Singapore based Philip Capital towards this, and we are also offering portfolio management services to bring in capital from South East Asia.
Is there a spike in remittances after the Brexit outcome?
There is a slight spike due to the favourable exchange rates, but it is too early to tell whether this will sustain. The bigger point is that capital will chase returns, and we will be very competitive through our expertise in investments and portfolio management.
Regarding Asset Quality Review (AQR) in public sector banks, do you think this tool has been a bit harsh and hastily implemented? Or do you think this couldn’t be postponed?
I am not sure much of a debate is required. It is already over. It is like treating a critically ill patient, and the doctor has to administer a painful and risky medicine to save the life. If the patient survives, all will appreciate the doctor and his medicine, but if the patient dies, the medicine and the doctor will be at fault. But the question is whether a responsible doctor can wait. I don’t think so, and that is what RBI did. It couldn’t be postponed and as I told you earlier, after the asset quality review, we have a realistic estimate of the NPAs in the system.
Since Dr. Rajan is already leaving, how do you assess his legacy at RBI and in the monetary policy of India? Do you feel that it would have been better for India if he was offered and stayed on for a second term?
Dr. Rajan is an outstanding professional and he has done exemplary work during his tenure. I think under him RBI has been very effective in its work. That legacy will continue, as a new policy framework has been established. Having said that, we should not be too worried about him not getting or opting for a second term, as RBI traditionally has a history of following a very professional and independent decision making process.
But don’t you think that the rate cuts that Dr. Rajan did could have been a bit larger each time, to boost the sentiment?
I don’t agree with the viewpoint that larger rate cuts could have made a meaningful difference to many of these large firms. Interest cost is only one element in the client’s decision-making process. There are numerous other issues like policy stalling, lengthy legal procedures, and so on. Then there are issues of gross miscalculations on the part of a few errant promoters who may have moved funds into other investments, and the value of which went down during the last few years. Businessmen, as far as I understand, are more concerned with the velocity or rotation of funds. And towards this, a 75 bps cut as against a 25 bps cut wouldn’t have made much of a difference.
What do you think of RBI’s latest debt recast model S4 (Sustainable Structuring of Stressed Assets) that aims to convert part of the debt into equity?
It is undoubtedly a good move, but as far as Federal Bank is concerned, we have very few accounts that might qualify for S4. Maybe only in the case of a couple of steel companies where we are part of the loan syndication. Anyway, as of now, I think such a call can be taken only in Q3.
Federal Bank is noted among other things for the better work culture and staff attitude when compared with traditional private banks. How did you lead such a change?
It is still a work in progress. Many targeted events that focus on learning and integration are under way. We have addressed the average age profile, geographical mix, ethnic background, gender mix etc. Today we have a large pool of talent whose average age is below 30 years. Also, around 50% of the staff is women now. When we started 400 new branches in newer geographies, we took care to recruit talent locally, and all together these policies have resulted in a more cosmopolitan work culture and is contributing a more pan India thought process in the bank.
How convinced are you on the Indian economic recovery that is said to be underway? Do you think the momentum accelerating, or are there any visible speed bumps on the way?
I am an India bull, but not necessarily for the usual reasons. We are performing way below our potential even now. I don’t agree to the view that India is a large economy of the world as yet. We are still a relatively small economy. We are not even one-tenth of USA, and even when compared with Chinese economy we are only one-third. Hence there is tremendous scope for growth. But as you rightly said, there will be enough speed bumps along the way. For instance, during the next 3 to 5 years, there will be a structural change in the world economy, led by Europe and Middle East, in which we will witness a more insular approach or de-globalization trend. Brexit is just the beginning. That will be a challenge for India too, but the Indian economy will overcome that speed bump too eventually.
How bullish are you on the banking sector, and on Federal Bank’s prospects in the coming years?
Now that there is a better grip on NPAs in the system, banking sector will only improve from here, but as I said earlier, it will also be dependent on the economic recovery of India. Having said that, for Federal Bank to grow, it is not a precondition. We are less than 1% of the Indian banking system. I always stress this point to our staff. Even if take market share from the biggies and become 1.5% or 2% of the industry, none of them are going to notice it even. With our digital offerings, our startup initiatives, our SME focus, and our leadership role in remittances, I would say that Federal Bank is in a sweet spot now, poised for growth.