BoM: Changing The Credit Culture

IN 2017, PUNE-HEADQUARTERED Bank of Maharashtra (BoM) was grappling with record non-performing assets (NPAs) and capital concerns, hit by the arrest of its former managing director in a loan scam, prompting the Reserve Bank of India to put it under the prompt corrective action (PCA) framework. Within two years the bank engineered a remarkable turnaround, betting on the retail, agriculture and MSME (RAM) segment and adopting a "no compromise" policy on the price of assets as it undertook business process reengineering, thereby improving asset quality.

The bank has emerged the top performer among public sector lenders in terms of business growth, asset quality and efficiency in Fortune India-Grant Thornton study of the country's best financiers.

In FY23, BoM's total business touched ₹4.1 lakh crore, almost double the ₹2.33 lakh crore in 2018 when A.S. Rajeev, the current MD and CEO, took over. "Our plan is to cross ₹5 lakh crore this year through organic means without compromising on asset quality," he says.

Tackling NPAs

While conducting a SWOT (strengths, weaknesses, opportunities, and threats) analysis after taking charge, Rajeev identified spiralling NPAs as the core issue. Though soaring corporate loans, led by the steel sector, were a cyclical problem in the industry back then, the contagion was seen afflicting the bank’s home and retail segments as well, with NPAs above 10%. In fact, for the agriculture sector, it was around 25%. "A bank cannot be run with such high NPAs. Hence a diligent credit culture was devised," says Rajeev.

The bank roped in retired bankers and scanned portfolios to identify deficiencies in loan sanctions, policies and processes. As a corrective measure, central processing cells were set up. Functions such as credit sourcing, credit sanctions and credit delivery were segregated, while inputs of agencies doing due diligence were made compulsory for all loans. Due diligence was also made a three-level process, depending on the account size. "That is how the credit culture was changed, which led to better credit quality," adds Rajeev.

BoM also adopted various proactive measures, including an app, to provide an integrated dashboard for managing stressed assets. This enabled real-time monitoring of suspect accounts by linking the system to all branches, zonal offices, and the head office. "There has been zero corporate slippage over the last two years. The slippage was seen only in the RAM sector, especially in case of agriculture. That also we are containing now," says Rajeev.

Setting Benchmarks

On the back of its initial success with asset quality, the bank began setting operational benchmarks — particularly an operating margin, covering a broad spectrum of activities. Earlier, the focus was on business growth without much concern for profitability, which led to operating margin falling way short at 0.25%. The new benchmark was set at 2%, in line with private banks. It means for every ₹1 lakh crore of business there should be ₹2,000 crore of operating profit every quarter; ₹8,000 crore annually. That math has worked out well. The turnaround strategy also called for cost reduction and income generation at every level, leading to the 'no compromise' policy on risk-adjusted pricing of assets.

The other major area of cost optimisation was office rentals. In 2018, the bank had 1,800 branches, with monthly rentals of over ₹15 crore, clocking a yearly bill of ₹200 crore. It identified and surrendered 16 lakh square feet of space in existing branches, and used the savings to set up 450 new branches, leading to ₹50,000 crore in additional business every year. Branches that failed to generate business growth of 5% CAGR over five years were converted into self-supporting customer service points (CSPs) with a handful of business correspondents. BoM now plans to set up one CSP in every district.

Business Strategy

Typically, banks raise resources (deposits) first and then lend. BoM has turned this strategy on its head — it lends first and raises funds later, to save on cost of funds. "Under this process, we create an asset (loan) to begin income generation, instead of the other way round, and then raise liability (deposit). We also have excess securities against which loans can be raised," says Rajeev. The bank doesn't have to lend the funds in a hurry because it has already raised them, he adds.

"Resources and growth are mostly from the RAM sector. There has been a focused approach to leverage the sector to generate a low-risk high-yield asset portfolio, adding to profitability," says Rajeev.

For optimising the cost of funds, the bank is focusing on CASA deposits, maintaining it around 54%. It is also fetching deposits at a lower interest rate of 50 basis points. All these initiatives have brought down the cost of funds to a low 3.25% to 3.33%.

Digitally Yours

More than 96% of BoM's transactions are currently digitised. This year, the bank's board has already cleared more than ₹1,000 crore in budget for IT and digitisation, and appointed the Boston Consulting Group to aid the transition. Advanced areas, including robotics, have been deployed to enhance operational efficiency and improve response time for customers.

"Digitisation is an enabler. It cannot be a substitute for human touch. We will continue to strengthen the IT infrastructure to add fillip to the digital journey of the bank. That is the policy of the bank," says Rajeev.

Going ahead, BoM's major challenge will be to retain its top position across parameters. But Rajeev is confident. The bank will also focus on improving its rankings in the parameters where it is second and third, he says. In FY24, BoM wants to be present in all 786 districts of the country, from the current 640.

The bank, which raised ₹1,000 crore through qualified institutional placement in June, is looking at a follow-on public offering, possibly in the last quarter of FY24. "Though there is no requirement for capital, it is mostly to honour the demands of customers and well-wishers, so that they can participate in the growth story of the bank. We may consider it after six months," says Rajeev.

The Pune-headquartered bank seems to have finally put its growth story on track.