The Bankers Who Saw Tomorrow

Banking is a very good business unless you do dumb things

—Warren Buffett

The Sage of Omaha quite succinctly describes the business of banking in the context of his investment in Wells Fargo, the US-based diversified financial services conglomerate. Unfortunately, the world’s fifth-richest person had to dump his over three-decade-old investment last year due to the lender’s poor handling of what Buffett described a “dumb” incentive system that snowballed into a scandal.

The turn of events clearly goes to show that while banking appears extraordinarily simple where a bank just needs to source funds cheap and create a strong asset franchise, it’s tough for bankers to be good at their game at a stretch. Yet, the reality is that every business has a bunch of outliers who continue to be good at what they do — day in, day out — especially in a nation that aspires to be a $5 trillion powerhouse by 2026.

That the banking sector is the lifeline of India’s economy can be gauged from the fact that there are 12 public sector banks, 21 private sector banks, 45 foreign banks, 43 regional rural banks, 1,470 urban cooperative banks and 96,000 rural cooperative banks, besides cooperative credit institutions. The financial architecture is the engine behind the $1.55 trillion bank credit and $1.54 trillion non-food credit flowing in the system (as of Februrary 2022).

Though a commoditised business, few banks have the strappings to lead from the front, and that’s precisely what Fortune India set out to do with its knowledge partner, Grant Thornton Bharat, in unravelling India’s Best Banks. The exercise couldn’t have come at a more opportune time, with the economy slowly finding its feet after a once-in-a-lifetime pandemic and an existential transformation underway in banking. According to marketing expert, Flint McGlaughlin, there are a series of conditions that are a prerequisite to an existential transformation: the first is awareness of a differential gap, and the second is dissatisfaction. Until there is awareness and dissatisfaction, true change cannot take place, believes McGlaughlin.

While the observation holds true for any business, it is more pertinent in the case of cut-throat banking where the leader has to be aware of a “differential gap” between its competitors, and also needs to display a constant “dissatisfaction” around the way of doing business. There has to be constant focus on staying ahead of the pack through constant innovation.

To separate the men from the boys, the study created five distinct groupings from 57 banks (barring rural and urban cooperative banks). The power of the club can be gauged from the fact that these 57 banks had a cumulative asset size of ₹194 lakh crore as of December-end 2021 and accounted for advances of ₹108 lakh crore, that is, 99.7% of the total credit outstanding as of December-end 2021.

Despite regulatory curbs, HDFC Bank emerged as the topper in the large banks category. The bank has topped the ranks across all parameters, except for coming second to ICICI Bank in terms of capital adequacy. That’s also a feather in the cap of its CEO Sashidhar Jagdishan, as his ascension to the top came in the most challenging time.

Just like HDFC Bank, the winner in the mid-sized bank category has always been known for its conservative approach. The strategy has worked well for Kotak Mahindra Bank over the years. It is not surprising then that in terms of business growth, the bank’s ranking is way lower than its peers. Yet it stands head and shoulders above in terms of asset quality, efficiency, profitability, and capital adequacy.

Going down the pecking order, among the small size private sector banks, Fairfax-owned CSB Bank — formerly Catholic Syrian Bank — has taken the top honours with a substantial gap in terms of ranking points between the second-best, The Tamilnad Mercantile Bank, in its category.

Given the role small finance banks (SFBs) are playing in terms of financial inclusion, the study has thrown up AU Small Finance Bank as the winner with Equitas Small Finance Bank coming second.

Unlike public and private sector banks, foreign banks have played a very limited role in India’s growth story. Of the 15 banks that have made it to the study, Credit Suisse has topped the charts.

Just like a phoenix rising from the ashes, the study also shows that state-owned Bank of Maharashtra is the winner among public sector banks, where the emphasis was not on the size but operational performance. Since its exit from the Prompt Corrective Action framework of the RBI in 2019, the bank has shown improvement in income profile and profitability.

In terms of business efficiency, also seen as the flywheel of banking, Bandhan Bank has come up on top, while the State Bank of India continues to leverage its digital platform to strengthen the moats around its business.

Banking as a business employs immense leverage compared to a corporate given the insatiable demand for credit but that also leaves little margin for error in the pursuit of growth. But what separates the men from the boys is their ability to withstand the vagaries of growth and avoid taking wrong steps.