We have a strong business model. Our retail loan book has grown by 30% in the last one year and we feel this kind of growth can be sustained. Our CASA has grown by 157%. These are strong numbers. But for growth, equity capital for a bank is the foundation. Also, we wanted to be prepared for the uncertainties from the Covid situation and deal with it from a position of strength. The fund raise would increase our CET-1 capital ratio by 200 basis points to 15.3 per cent.
How much of the decision is because of Covid-19?
As a banker it is my first job to be safe. If I see flu is in the air, I should first take insurance protection. This capital raise is like that insurance protection. The book value per share has come down from Rs 31.8 to Rs 30.4 because of this issue (down 4.5%), but it’s a small price to pay to breathe easy.
The fund raise is despite the slow start on the loan book front…
Like Rahul Dravid, I want build a solid foundation first and then hit centuries. I don't want to hit a six in the first ball and get out by the sixth. Brick by brick we are building the foundation. By being fully capitalised, we don’t have to look at how much gas is in the tank; at present, the tank is full.
Why ICICI Prudential Life and other insurance companies? Was it easier because you were heading that institution many years ago?
ICICI Prudential Life has been in touch with me since my Capital First days. They see the bank as Capital First 2.0. HDFC Life and Bajaj Allianz Life have also invested. IDFC is investing another Rs 800 crore to keep its stake at 40%. Warburg Pincus had a choice, but they chose to invest in us again. People with long investment horizons will find our bank an amazing opportunity. Ours is a simple bank. We take deposits and lend to good quality people; we don’t do any complicated trades.
We have outstanding corporate governance. The equity raise has happened without any traditional face-to-face interaction. This is the first equity raise for the bank, and fifth for me since my Capital First days. We are happy we could raise equity of such high quality and size, during lockdown.
How has the bank’s business fared during the lockdown?
Disbursements have been hardly anything in April. Things will be slow for sometime. You're spending nothing, nobody's earning any income out of you and when money is not circulating, nobody will make any money. As the lockdown is lifted, bit by bit, the economy will start moving. Maybe your hair is overgrown, maybe your clothes are worn-off, so you’ll go to the salon or to the retailer. That will start pulling things little by little and eventually things will fall into place.
But will the extended lockdowns push back the banking system's recovery, which was anticipated in FY21?
Yes, the system has been pushed back by Covid-19. The government has done a great job in proactively implementing the lockdown. You can’t imagine how many millions could have caught the infection without this lockdown. But from now on, the system should open up systematically as people’s financial cushions could vanish soon.
Your peers have turned cautious in their business. Many don’t want to give any guidance. Does that pose an opportunity for you?
No. It is time for us to be cautious too. It is an evolving situation, they aren’t wrong. Millions of small businesses have got badly affected by Covid-19. We’ve already lost a month, and probably will lose another five months so that’s at least 6-9 months lost probably, and permanently gone. But we should see our business as a going concern, as one that’s going to last decades, and see it in that light.
Will the position on legacy loans change after Covid-19?
In the last four quarters, when there was no crisis, most of the troubled corporate loans were recognized and accounted for. Last quarter things were behind us. But what Covid-19 will do to our remainder legacy accounts or to the retail book, we will wait and see and monitor closely.
Was it only a margin call trigger that forced you to sell some of your stake in the bank?
I had exercised ESOPs using a loan when Capital First was at Rs. 800 in 2018. I could have sold it then, but didn’t sell it for 2 years as I believed in what we are building. Again, recently I exercised ESOPs at Rs 40 by a loan and kept the position on leverage, thinking I’ll simply sleep on it for five years, it will multiply from here. Plus, I had pledged the stock and made social contributions thinking I’ll square it later easily after a few years of appreciation. We were on track also. But unfortunately, Covid-19 came, the stock halved in four weeks and the margin call was triggered.