Preparing for another century

It’s a Monday morning and the first rain clouds have started to gather over Mumbai’s Bandra Kurla Complex. Anil Khandelwal, chairman and managing director of Bank of Baroda, is seated beside the glass wall of his spacious ninth floor office.

 Beyond this window, he can see two large glass-and-concrete buildings – one that belongs to a multinational bank and the other, of a growing Indian private sector bank. His being a public sector undertaking, both these edifices stand as obvious reminders of the highly competitive industry his bank is part of.

Competition is not new for Bank of Baroda. On 18 July this year, the bank entered its 100th year of service. It’s been a rather eventful journey and, more recently, the times have been tumultuous. Despite a domestic network of 2,500 branches and over 1,000 ATMs, Bank of Baroda had been falling in the rankings. And while it still is among the largest in the country, competition has been catching up. “The bank’s asset base was a lot larger than that of competition in the 1990s,” says its past chairman S.P. Talwar, who went on to become deputy governor of the Reserve Bank of India.

 Analysts say Bank of Baroda is surely growing, but much more slowly than its competition because it hasn’t been equally aggressive. Tell that to Khandelwal and he disagrees completely. “We have a sound strategy. At the end of the day I am accountable to the people. It is their hard-earned money I have to look after,” he says. Second, he points to a listing prepared by the UK-based Banker magazine. “We jumped up a record 143 points this year,” he says. Third, when Khandelwal took over in 2004 the bank’s size was Rs123,000 crore. Last year, it crossed Rs200,000 crore, with a net profit of Rs1,000 crore. “We should touch the Rs250,000 crore mark this year,” he says. If that goes through, he will have doubled business in his term, which ends by March next. And lastly, he rustles through some papers and brings up a chart. “We’re on the rebound. If you look closely, you’ll see that, after every fall, we have bounced back much stronger,” he adds.

Getting here has been a task in itself, one that its managers are proud of. The bank’s history includes a king who started it all, its struggle to expand, how it managed to not become part of the SBI fold, and its next stage of growth. A foray into Dubai 30 years ago, for instance, is today paying dividends. “We are the only Indian bank in that country that has the licence to run a branch,” says its executive director Satish C. Gupta, who recently came over from Bank of India. 

Throughout its history, Bank of Baroda has managed to stay profitable every year. When Basel 1 norms came into force in the early 1990s, it was one of few Indian banks that posted a profit, a tidy sum of Rs8 crore. Much of this was due to a rapid rural expansion that took place in Uttar Pradesh and Rajasthan in the earlier years. There are customers who swear by its service. Charles Patel, for instance, who ran a mom-and-pop shop in London, today travels in a Rolls Royce. Suresh Ruia, who runs a profitable textiles business in the UK, has a similar thing to say. “I borrowed £250,000 against £40,000 from Bank of Baroda, because it was impossible to find a lender in London. Today, I have a £25 million operation,” he says. Kirit Patel, CEO, Day & Lewis chain of pharmacy outlets, concurs. “Bank of Baroda has maintained its integrity in the UK,” he says.

But there are critical changes that have yet to reach completion, especially on the human resources and technology fronts. This may be a tad bit easier task for Khandelwal, since he knows the bank like the back of his hand. Barring a single year, when he was posted to Dena Bank as its chairman, Khandelwal has worked throughout his career at Bank of Baroda. He joined in 1971 as a direct officer, after studying chemical engineering in Kanpur. Then followed a study in law for three years, a management degree and a PhD, with a thesis on human resources in Bank of Baroda under the terms of five chief executives.

The subject of social sciences is, in fact, close to his heart; and employees within the bank call him a people’s man. Little things – like a monthly birthday cake cutting for all employees at the head office – matter. Or a monthly letter sent out to all employees informing them of the bank’s status, its achievements, its challenges and targets. Or the introduction of a performance-based reward system, the first Indian PSU bank to do so.

 “It is important that every employee knows what the bank is going through,” he says. “There are so many banks with branches within India, for instance, where employees have never seen a chairman in the past. I make it a point to travel to them as much as I can.”

The headcount today stands at 40,000. This is down from 42,000, and is a number that is hard to stick by with the bank’s changing focus towards technology. And the problem at Bank of Baroda, says a senior official, was the complacency that had set in. “When you’re among the biggest, you have little to worry about,” says Dipankar Mookerjee, general manager (marketing and human resources).

 It is bringing about this change in culture that is Khandelwal’s biggest task. The change started with a new logo, and it faced a whole lot of internal opposition. Then when competition started 12-hour banking, Khandelwal brought in 24-hour banking – manned by people at all times, in nine metro branches. This is despite Bank of Baroda being a public sector undertaking that could have faced severe opposition from the unions. “There is 12-hour banking too, which takes place at over 500 branches across the country,” says executive director V.J. Santhanam, an Indian Bank veteran who’s been with the bank for the past eight months.

 Only recently, a HR consulting firm Right Grow Talent was roped in to train 300 senior executives over a period of 18 months, as part of a succession planning initiative. “There has been a good initial response to the course,” says Anil Sachdev, Grow Talent’s chief executive officer. “Everyone is excited. We are now creating HR processes in line with the bank’s strategies. These managers will soon take up projects undertaken by the company. But the proof of the pudding will finally be in the eating,” he adds. Internally, another 10,000 staffers are being trained to boost up the marketing front. Many will take to the field; others will serve on the front office. “And the employees are ready to battle it out,” says Mookerjee.

The front office itself is changing. Bank of Baroda has roped in consultancy firm McKinsey some months ago to restructure the organisation. The first outcome was a concept called Retail Loan Factory. “The problem was obvious. We have branches across the metros, but these lacked focus. We used to cater to small and medium businesses here and the retail customer would get ignored,” says V.G. Subramanium, who now has an extended term as advisor to the Bank. This restructuring has led to the shifting of all SME business to locations where efforts on such businesses could be concentrated – treated as if it were an assembly line.

The delivery model helps in speedy appraisals and decision making (within a week’s time promise). Mumbai, Delhi, Ahmedabad, Bangalore, Baroda, Jaipur, Pune, Kolkata and Chennai now have one each. Soon there will be 20 centres across the country. This restructuring had a dual advantage. It relieved individual branches, allowing them to focus purely on sales and services.

Next, businesses that had turnover of above Rs500 crore were brought under a new wholesale banking division. Here no delay is acceptable, and decisions are largely made on the spot. “There are companies, large Indian companies that have bases abroad,” says S.C. Kalia, general manager (wholesale banking). “They take part in mergers and acquisitions. Meeting their basic needs may not mean money. But say there’s an acquisition, or a large money transfer. There is money to be made in structured finance, fees and in currency arbitrage. Our target changed: now every corporation with a turnover of above Rs500 crore is a potential customer.”

There is a heightened sense of urgency to grab business on this front, and its results are starting to show. “This is a government sector bank that is getting as competitive as a private sector bank,” says Murari Mittal, executive director (finance), Welspun Group. “There is a quick decision making process, and they are competitive on the pricing front.”

On the international front, the pace has picked up too. A representative office in Australia was shut down in 1981. But another licence is now being sought after. Moves are being made throughout Africa – Tanzania, Mozambique, Uganda (see box). “Africa is the next emerging destination. And when it will be ready, we’ll already be there,” says Khandelwal.

That leaves only upgradation of technology. Bank of Baroda’s competitors have been crowing about their online models. It is on this front that the bank is playing catch up. A core banking solution has finally been rolled out in over 1,000 branches and another 1,000 are underway. Being a late entrant has given it one advantage. “Many banks outsource such services in different countries, which means different software in different countries,” says Balu Doraisamy, managing director, HP India. “Bank of Baroda has one global data centre based in Hyderabad, which brings down significantly its cost of operation. It also lowers training cost and testing time,” he adds. “It also has a global treasury that is completely integrated, which means currencies can be converted with much more ease.”

There is, however, still a lot more that can be done on the technology front. ICICI Bank, for instance, has raised billions of dollars through online deposits, reducing the cost of operation one-fifth and offering it back to global customers through higher rates of return. Yet it was easier for them to move into technology, because Kamath did not let ICICI Bank become a PSU. Khandelwal has performed well despite all the limitations that come with a PSU bank. “The need of the hour is not much about the past 100 years, but learning from the past and preparing for the future,” says V.R. Kamath, senior vice-president (treasury and finance), Reliance Industries. “Bank of Baroda has expanded substantially over the last three years. It is making its presence felt.”

In the near term there may be a need to raise more capital, and with Bank of Baroda’s FII limit having touched 20 per cent, only easing of this requirement can bring in some relief. The BoB credit card, among the first to launch in the country, today has just 200,000 members and a joint venture partner is being looked out for. An insurance business will take off soon, along with two other partners. And BoB Capital, its investment banking outfit, was launched recently.

The long term, however, would require keeping up with the changing culture of Indian banking, and the introduction of latest technologies into the bank’s fold. “Khandelwal has done a big transformation so far. This bank has latent potential that is now being unleased,” says Yes Bank’s chief executive officer, RanaKapoor. That’s exactly what Khandelwal has been gunning for. “We have to be competitive not just in an Indian environment, but also internationally,” says Khandelwal. “This is no longer an option,” he adds.

In doing just that he will have set for the bank, its next milestone.

The king’s mohurs

On 18 July 1908, amidst much fanfare, Maharaja Sayajirao Gaekwad III, then ruler of the State of Baroda, took an elephant ride to a small rented office in the heart of the city. This was a time when the Indian banking system was starting to change. All along, traders had borrowed from individuals, who would lend based on a person’s perceived trustworthiness. It was common, therefore, for a firm to collapse with the death of its founder.

Sayajirao, on the other hand, wanted to build a modern banking system. He would spend his summer vacations in London or Europe, trying to understand the shape a new India could take and the role his state would play in it. He built M.S. University which, for long, stood as one of the best in the country. And Kala Bhavan, Baroda’s engineering college, was India’s first. He funded the education of Babasaheb Ambedkar and brought V.T. Krishnamachari and Aurobindo Ghosh to work in his state.

This morning of 18 July was auspicious, since astrologers had predicted that eight planets would come together in a mathematical conjugation. The king thus arrived at the office a little before 11 am, and in a silver plate filled with 101 gold coins, he made his first deposit. This was to be the Bank of Baroda, and all functions of the Royal Treasury were handed over to it. All chief executives of the bank till 1952 were Scottish in origin. And, while the royal family remained close to the bank at all times, as a matter of principle, they never borrowed from it.

But, as the bank grew, its priorities began to change, and its chief executives felt the need to expand. By 1945, the bank had stretched into Bombay, Delhi, Amritsar and Coimbatore. In another remarkable step, its headquarters were moved to Bombay too. This expansion, in fact, turned out to be a milestone. “When nationalisation took place, we were allowed to go it alone. Banks of seven other provinces were brought under the SBI fold,” says the bank’s former chairman, A.C. Shah.

The 1950s was also a time when Indian banks had started to recognise the importance of a large Indian diaspora abroad. Kenya, with its large Indian Gujarati community, was Bank of Baroda’s first target. Its first overseas branch came up in Mombassa. Then, another was launched in Uganda. When Asians were asked to leave Uganda, they moved to London. And with them went Bank of Baroda. A larger international expansion followed, into places like Fiji and Guyana. All countries – with large Indian communities and with a British banking and legal system – were targets.

While international expansion had been centrestage, the local focus had not been neglected. In the year 1963, for instance, came a series of acquisitions – first Hind Bank was brought into its fold. Next New Citizen’s bank was acquired. Both acquisitions not only increased the bank’s asset base, but also expanded its reach within the country.  Then came the 1970s. The Indian government had increased its focus on rural areas and agri-banking, and domestic expansion was necessitated. Bank of Baroda was asked to expand in Uttar Pradesh and Rajasthan, where its branch numbers were in the single digits. Today, the total number of branches in Uttar Pradesh is above 650.  In 1996, when the disinvestment process began, Bank of Baroda was the first PSU bank to hit the bourses.

Could Win work?

It could have been a winning combination. Some time in the early mid-1990s, officials in the finance ministry came up with a plan. The State Bank of India was too big in size and to bring in healthy competition, it was necessary for the country to have another bank that was equally large.

The plan was to have a grand merger. Bank of Baroda and Dena Bank had much in common. And Bank of India and Union Bank of India had much in common. Moreover, Bank of Baroda and Bank of India had a large overseas presence too. All had good presence in the more prosperous belt of western India. This bank was to be called Win Bank (Western India National Bank). But halfway through the initial stages, a Harshad Mehta stock scam derailed the entire process.

Now Bank of Baroda is preparing for 2009, when under WTO obligations the Indian banking market will have to open up to foreign competition. Sources say the proposal of Win Bank has resurfaced and is doing the rounds again. Already Bank of Baroda, Union Bank of India, Bank of India, Yes Bank and a large foreign bank are in the last stages of an MoU to start an asset management company.

But this is only one option. There is in fact, another strategy to merge with a south India-based bank being considered, which would increase Bank of Baroda’s national presence. Indian Overseas Bank has a strong presence in south India. “And unlike the Gujarati community, south Indians do not move their money into the stock markets as soon as the Sensex starts to rise,” says an analyst. Moreover, Indian Overseas Bank also has an international presence in South Korea, Thailand, Singapore and Malaysia, apart from China.

 The need to merge or acquire is not urgent at the moment. But soon, there might be few options

Spreading out

While the move into Kenya in 1953 was largely due to cater to the local Gujarati community in that country, Bank of Baroda soon began to expand in other directions too. Its latest move was into China, where the bank has acquired licences to set up two branches. It will spend more than $50 million, setting up two branches there. Approvals from the China Banking Regulatory Commission will allow it to establish a branch in the eastern city of Guangzhou and another branch in Shanghai.

Khandelwal, however, has other numbers to show. His focus is on structured finance and increasing the fee-based income of the bank. For one, the International Merchant Banking Cell has sanctioned 48 proposals (amounting to more than $1 billion), out of which it was mandated as the lead arranger in nine proposals. In the previous year, it sanctioned 22 accounts amounting to $266 million.

“Since it opened its first office in December 1953, Bank of Baroda has expanded its presence to 21 countries now, through its branches subsidiaries, joint ventures and representative offices,” says K.K. Agarwal, general manager (international). In Africa alone, it has offices in Botswana, Kenya, Mauritius, Seychelles, South Africa, Uganda, Tanzania and Zambia. Expansion will continue in Johannesburg, Ghana and Mozambique. Bank of Baroda also has six branches in the UAE and two electronic banking licences.

(This article is reproduced from Business India magazine. It first appeared in our issue dated  July 29, 2007)