Inside Bank of Baroda’s silent transformation
10 min read . Updated: 03 Apr 2023, 11:50 PM IST
Premium- The public sector bank’s growth rates are now on par with many private sector peers
- The pecking order in public sector banks is led by the State Bank of India. BoB had been the No. 3 for many years but has now beaten PNB for the second slot.
In the last week of September 2021, Mukund Rajan, the former chief ethics officer at the Tata Group, showed a bunch of Bank of Baroda (BoB) executives a video clip from the 26/11 terror attacks in Mumbai. The Taj Mahal Palace, Colaba, owned by the Indian Hotels Co. Ltd, a Tata group company, was at the centre of this carnage. The hotel staff put customer safety before their own, saving several lives.
Rajan tried to convey that a strong culture of ethics at the Tata group made employees do what they did.
“Mukund Rajan talked about the best practices in ethics at Tata and how consistent and effective communication and reinforcement of the values lead to desired behaviour of employees," Rupali Aneja, chief manager (corporate ethics), Baroda Corporate Centre, wrote in an issue of the bank’s magazine.
A month before, in August 2021, BoB launched the corporate ethics function of the bank. Rajan came in as an advisor.
The idea to have a separate team to drive the ethics function is among the several changes the public sector bank has mooted and executed in the last three years. Led by Sanjiv Chadha, the bank’s current managing director and chief executive officer (CEO), the lender is on a mission to reinvent itself by adding a dash of aggression of the private sector.
The pecking order in public sector banks is led by the State Bank of India (SBI). BoB had been the No. 3 for many years but has now beaten Punjab National Bank (PNB) for the second slot. It surpassed PNB in term of total business – deposits plus loans—in the December quarter of 2022-23. On total loans, BoB edged past PNB the year before, in the December quarter of 2021-22.
BoB’s corporate loan portfolio swelled from ₹2.92 trillion in 2019-20 to ₹3.29 trillion as on 31 December 2022. While the 13% rise might not seem astronomically high, it is certainly growing at a faster clip than many of its rivals. SBI’s corporate book grew 9.6% in the same period. To be sure, SBI’s current corporate loan portfolio is almost thrice the size. BoB has also done well when it comes to retail loans. From ₹1.2 trillion as on 31 March 2020, the retail loan book has increased to ₹1.7 trillion as on 31 December 2022, a 42% jump.
In fact, BoB’s growth rates are now at par with private sector peers and the bank sees a stable performer like HDFC Bank as its true competitor. In the December quarter, BoB’s total loan book grew 19.7% over the year-ago period, same as ICICI Bank’s growth rate, and a tad more than HDFC Bank.
How did the bank’s fortunes change? It is certainly not easy to make an elephant dance, one which is 115 years old. The bank was founded by the Maharaja of Baroda, Maharaja Sayajirao Gaekwad III, on 20 July 1908. It was nationalized in 1969. Over the following decades, the bank added many innovations it could boast of. For instance, in 2006, it established a ‘retail loan factory’, a sales and delivery model inspired by the assembly line production principle. And yet, the bank was rarely seen to be top class.
BoB’s new avatar is broadly because of three changes in the last eight years. First, the bank prioritized investments in technology. Second, the bank’s merger with two public sector peers was used to cut costs and make the lender nimbler than before. Third, lateral hiring was encouraged and several people have been inducted at market salaries to lead specialized verticals. This resulted in new energy, ideas, better execution, and outcomes.
The tech play
In 2015, P.S. Jayakumar was picked by the government as BoB’s managing director and CEO. A former banker with Citibank and an entrepreneur, he became the first appointee from the private sector to run a large public sector bank.
When he first walked in, about one-fourth of the space in BoB branches was used to store paperwork. He decided to rid the bank of papers. The saved space could be used to attend to customers while reducing the effort needed to move the documents around. The bank has come a long way since. Now, older records have been digitized. Technology has made deeper inroads in other ways. About 90% of internal meetings—board meetings, credit committee meetings, etc–are virtual.
From the customer perspective, the bank has been wooing people to open accounts online and transact on its mobile app, Bob World. The app now records 8.6 million daily transactions, as against 6.4 million a year ago. It has 27.3 million active users, as compared to 57.5 million registered users on SBI’s app Yono (an abbreviation for You Only Need One). Like Yono, Bob World has tie-ups with e-commerce companies and offers online shopping and travel booking.
“Today, as many as five times the number of customers use Bob World every day when compared to customers coming to our 8,200 branches," said Chadha.
Customers now have three primary modes of account operations: digital (mobile app, internet banking); assisted-digital (branch executive using a tablet to assist); and business correspondents. The bank has close to 48,000 business correspondents as of December, as against 18,120 in 2019-20. Business correspondents help in banking transactions, largely in rural and semi-urban areas.
“Technology for the sake of technology is not good enough. It is useful if it actually helps you give better customer service, reduces your costs, improves your risk management and customer experience," said Chadha.
BoB’s tech play certainly ticked some of these boxes. Pushing digital instead of branch banking has led to cost savings. The number of branches has declined from 9,528 in March 2020 to 8,209 by March 2022.
The big merger
Apart from starting BoB’s digitization journey, Jayakumar also partly oversaw another transformation—the three-way merger between BoB, Vijaya Bank and Dena Bank. The Government of India wanted public sector banks to consolidate since it believed that India needed fewer but stronger banks.
While the merger exercise began in 2018, it was completed only in December 2020. Chadha had taken over the reins by then. This merger, and the pandemic, helped the lender become nimbler and stronger than before.
“If you look at all the mergers that took place subsequently, I do not think our kind of ambitions were targeted anywhere else. The ambition was to realize savings of ₹10,000 crore over a five-year period and, to the credit of our team, we have almost executed the plan to the T," said Chadha, seated in a room adjacent to his cabin in the bank’s headquarters in Mumbai’s Bandra Kurla Complex, a business district.
The bank’s employee count has steadily reduced. BoB had 84,283 employees at the end of 2019-20. In 2021-22, it had 79,806 employees. This, coupled with a rise in profitability, led to an increase in business per employee. Meanwhile, BoB’s operating expenses are rising at a slower rate than its peers. It rose 9.8% year-on-year in December 2022, as against a 16.7% at SBI and 25.3% at PNB.
Lateral thinking
In December 2021, the Union Bank of India refinanced loans worth ₹8,000 crore to Vedanta Ltd. The metal and mining company also banked with BoB and this transaction made Chadha rather unhappy.
An industry watcher, who didn’t want to be identified, said that the CEO was displeased since BoB’s corporate loan department had no inkling of this deal; he chided them for the lack of market intelligence.
To avoid incidents like this, BoB recently hired an executive to head large corporate relationships from the private lender, Kotak Mahindra Bank—a sign it is serious about large loan syndications. Of course, BoB wishes to nurture existing corporate relationships better.
While BoB did not comment on the Vedanta affair, Chadha said that the said executive’s tenure in the bank and movement will not be dictated by its normal cycles of promotion and transfers. Similarly, the bank has made more lateral hires over the last seven years. These include the chief risk officer, the head of home loans, and the head of collections, among others.
These executives have brought in a new spirit, and aggression—the bank has become quite a risk taker. A rival banker said that BoB is the new kid on the block. “You will find them in most large consortiums now even where others are circumspect, like in some greenfield projects," the banker said.
However, BoB officials said Chadha is not quite in favour of undercutting other banks and has set a floor price on large loans below which the bank would not entertain new proposals.
BoB, nevertheless, is clearly competing with private sector lenders, known for quicker turnaround times and better use of technology. Even if public sector banks have a majority of the credit market, private sector banks contribute to more than half the incremental business.
Chadha is well aware of this. “To thrive, one cannot imagine that there is a sequestered space which is reserved for the public sector. You have to compete for the same customers," he said.
Analysts do believe that BoB is making strides in the personal loans segment, a move that would balance out its book in favour of retail credit. As on 31 December, 43.3% of its domestic loans were to corporates, 26.8% to individuals and the rest to small businesses and agriculture borrowers.
“The focus on growing the retail book is now a lot more pronounced. When they look at their overall growth, they want to continuously move more and more in favour of retail," said Nitin Aggarwal, head of banking and financial research at Motilal Oswal Institutional Equities.
Eyes on Chand
BoB has benefitted from the vision, and the execution abilities of two successive CEOs. Jayakumar was able to change the public sector unit culture of just being process-oriented—BoB became result-oriented as well. Chadha was able to press forward with the bank’s transformation. A voracious reader and a persuasive speaker, Chadha’s colleagues praise him for clarity of thought. But his term at BoB will end in June 2023. The big question: will his successor be able to maintain the bank’s growth momentum and the good job on managing expenses?
The Financial Services Institutions Bureau (FSIB), an organization that advises on appointments in state-owned financial services companies, recently recommended Debadatta Chand as the new chief of BoB.
A former PNB executive, Chand had some time to familiarize himself with the operations at BoB—he was appointed as executive director at the bank in March 2021.
But he is likely to face uncertain times. Retail borrowers are possibly turning anxious after the Indian central bank’s steep repo rate hikes. The competitive landscape is not getting easier either. Banks, today, don’t just compete against one another but have non-bank lenders to deal with. Be it loans (retail and corporate) or deposits, banks are working hard to attract customers to their fold.
Chand will also have to keep an eye on the asset quality of the bank. Although bad loan numbers might be at their decadal best, stress is expected in the small business segment.
Lastly, while private banks are now the performance benchmark and BoB has hired laterally, the bank will still remain state-owned in character and ownership. That may leave little room for manoeuvrability. For instance, it would still need to seek tenders for all its needs, something private banks can avoid and save time.
Chand and BoB will not have it easy.