The Gandhian capitalist of Ujjivan

A phone call interjects as we start to chat. “Make red (parboiled) rice and regular fish curry,” says banker Samit Ghosh, instructing the person on the other end about his Saturday dinner menu. “What’s the variety of fish? Have you checked?… I don’t want seer fish [a popular south Indian sea fish],” says Ghosh. It’s rare for Bengalis to take a liking to sea fish after being used to river fish like hilsa. “Make either ladyfish or pomfret,” he says.

Like how meticulous the 69-year-old Ghosh is about his meals, so is he about his plans for his last year in office. In a career spanning more than four decades—a large part of which he spent at Citibank—Ghosh built one of India’s most successful non-banking finance companies (NBFCs), Ujjivan Financial Services, which in 2017 went on to become a small finance bank (SFB). The company has managed to successfully make the transition despite being in a highly regulated sector. It ranks 91 on the Next 500 list after dealing with big challenges such as the impact of demonetisation. As CEO and managing director (MD) of Ujjivan Small Finance Bank, which serves more than 4 million customers, Ghosh is busy finding a successor. “According to the RBI [Reserve Bank of India] guidelines, I can serve the bank only till 70. So six months ago, we started the process to look for a successor. We appointed Egon Zehnder [a global executive-search firm] to help us,” he says. The bank has picked three prospective candidates from the Indian banking system and has submitted an application to the RBI on January 25. “By June this year, the person should be on board,” he adds. In an interview with Fortune India Ghosh talks about his journey at Ujjivan: leading its transition to a small bank, cracking banking regulatory challenges, and his plans after retirement. Edited excerpts:

From an NBFC-MFI (microfinance institution) to a small finance bank, it’s been a challenging path. What has kept you going?

In Ujjivan, we always try to figure out a new path. In a crowded microfinance market, it is important to find your niche and customer base that you want to serve. And importantly, how do you want to serve them. In 2005, when we started there were a lot of microfinance players such as SKS Microfinance (now Bharat Financial Inclusion), Spandana Sphoorty Financial, and BASIX serving the rural population. But the urban poor, one of the fastest growing segments in India, did not have adequate access to financial support through microfinance. Ujjivan focussed on the urban poor and built its model around it. In the initial days, we also realised that the back-end of microfinance was very primitive. It was like an old nationalised bank in terms of operations, technology, service, products, and risk management. Coming from a retail banking setup, we married the retail banking back-end to the front-end of microfinance. And that became a very successful model for us, [and] allowed us to scale faster. Despite the challenges and highs in all these years, it is patience, tenacity, and a firm belief in the purpose of my work that pushed me to do more.

After Ujjivan received in-principle approval from the RBI in September 2015, you had 18 months to transform it into a small finance bank. How did the bank shape up?

We always aspired to be a specialised bank serving the segment which is outside the purview of the usual banking system. We were targeting a huge chunk of India’s population which was unserved and underserved. In late 2013, when Raghuram Rajan [former RBI governor] came in, he was very passionate about financial inclusion and was open to new ideas. We had many dialogues with the RBI then, and that is how the concept of a small finance bank and payments bank was developed. Luckily we got the licence. The transition period was tough. All the preparatory work—including hiring, setting up the technology infrastructure to provide banking services and fulfilling regulatory issues, and retraining the existing workforce to sell banking products—took us almost two years. We were able to start the banking operations from February 1, 2017.

The transformation wasn’t quick or easy. How did you push through the roadblocks?

Unfortunately, the demonetisation [in November 2016] took place just a few months before our bank launch. That was a big blow. Converting into a bank was enormous stress anyway and to cope with demonetisation on top of that was extremely tough. As a result, we had to scale down our initial plan in terms of what we wanted to do during the launch, including the number of bank branches we were going to start with. We already had over 450 microfinance branches, which anyway had to be converted into bank branches. So opening new branches was tough as our finances were all focussed on how to handle the cost of demonetisation on the business. We had to incur a credit cost in terms of how much loans we have to provide for and how much to write off. Post-demonetisation, we had to provide for bad loans and some of it we had to write off as bad debt. On the whole, our credit cost shot up to about ₹310 crore. Demonetisation and additional cost incurred in setting up the bank impacted profitability. But we were determined to clean up the books and fully provide for whatever losses we had to incur because of demonetisation. We somehow managed to break even at the end of the year. We shouldn’t be in the red. That was the target.

What were your major challenges?

In an SFB, promoters are required to hold 40% stake. We changed our structure to a holding company to meet that requirement. So the old NBFC-MFI (Ujjivan Financial Services Ltd or UFSL) became the holding company and the bank was made its wholly-owned subsidiary. And according to the RBI guidelines, all the assets and liabilities of the holding company should be transferred to the bank. So today, the holding company owns 100% of the bank and that’s the promoter. Another RBI guideline stated majority [at least 51%] of the bank’s share must be owned by domestic shareholders. But over 90% of the holding company was owned by foreigners. We had to do an initial public offering (IPO) of the holding company [in May 2016] to dilute the foreign stake and we did it at a difficult time because most of the public sector banks then were announcing poor earnings, as they had to provide for all their bad loans. But we were fortunate that the investor community and shareholders bought our story. Our IPO was subscribed 41 times. After the IPO, the foreign shareholding was down to about 45%.

What are the regulatory hurdles you are facing now?

The requirement under the Banking Regulation Act, 1949, is that an MD of a bank cannot have substantial equity holdings in any other company. The Act defines substantial as ₹5 lakh face value of the shares held in any company. UFSL is the holding company which went public. All our shareholding is in UFSL, which owns 100% of the bank. As the MD of the bank, I cannot own shares of the holding company as it is a separate legal entity. Four of the 10 SFBs have this holding company structure where the MDs are impacted. Now all of us were required to divest our shares and only allowed to hold the minimum permitted. I owned around 2% of UFSL when we went public. I had to go through the process of divesting my shares. Right now, I own only 50,000 shares of UFSL. The rest I have either given away to my children or sold. In the process, I turned myself into a ‘Gandhian capitalist.’ Besides, when the rules and regulations for SFBs were being formulated we had discussions with the RBI. The rule was that on completion of three years, the bank has to list but we had already listed the holding company (UFSL) which owns 100% of the bank; virtually that means the bank is listed, but technically the holding company is listed. We had requested them to allow us to do a reverse merger [between Ujjivan Small Finance Bank and the listed NBFC entity]. But unfortunately, the RBI decided that we have to list the bank; and right now that is a big challenge for us. By February 1, 2020, we have to list the bank and by February 1, 2022, we have to reduce the promoter shareholding in the bank to 40% ... We also need to protect the interests of our original investors. If we are to have two [listed] entities, the value of the holding company will surely fall. So how do we protect the value of our early investors? We are working on various alternatives.

You are currently working on your succession planning. So, how tough it is for you to let go?

As the leader of an organisation, to find a good successor and ensuring there is a smooth transition are among my key responsibilities. So we have tried to identify people who understand the value and objective of Ujjivan—about financial inclusion and becoming a mass-market brand. In the next seven-eight years, we need to get to 40 million customers from 4 million at present. That person should be able to do that; we need a person who has that kind of background to drive a vision, not just a business. It’s not easy to find somebody who shares the same vision [as me]. And also the person has to be based in Bengaluru. Most bankers are based in Mumbai.

Any learning from IT major Infosys in terms of getting a successor from outside to run the company?

Infosys is a big lesson for me. So I don’t want to be in the predicament of Mr. [N.R.] Narayana Murthy; that is why selection is very important and alignment of objective is very important; alignment of goals and values is important. Also most of my career I spent with Citibank. It had a brilliant charismatic leader in John Reed [former Citigroup CEO], under whom actually the brand grew dramatically. But his biggest folly was his succession. Anyone who came close to becoming his successor within the organisation, unfortunately, did not survive. They all left and became leaders of other banks. Ultimately what happened was he did a merger with financial conglomerate Travelers Group, and then Travelers took over Citi and virtually destroyed what Citi was. I have seen this happen and want to ensure I’m neither in NRN’s predicament nor make the same mistakes that John Reed made.

What are your goals before you retire?

For this year, one is to manage the transition to the new leadership; two is the whole regulatory issue—to complete the listing and all of that; and three, obviously we have to grow the business. At the same time, there are a lot of testing issues—making sure all the processes and systems are in place and are compliant from a regulatory point of view. Apart from that, I am reading books on Swami Vivekananda’s works and teachings. I am trying to understand from those books what is atma [the soul]. Are you content with your achievements? What is your post-retirement plan? I am very content with myself (laughs). Post-retirement plan is to read Swami Vivekananda’s books more thoroughly. I started my career as a full-time banker in 1975, so I have been working for over 45 years. Before that, I went for my MBA degree and worked in Kolkata for two years. It is now time to relax a bit. Travelling and reading will definitely be a part of my retirement plan. I have a pile of books I want to read.

This story was originally published in the March 15-June 14 special issue of the magazine.