The Hindu : ICICI Bank's predicament

Online edition of India's National Newspaper
Saturday, Apr 19, 2003

Business

Business

ICICI Bank's predicament

By C. R. L. Narasimhan

Can ICICI Bank adopt "mass banking'' goals while positioning itself as a technologically enabled provider of quality financial products? The mini-runs might force banks to rethink such strategies.

The circumstances leading to the panic withdrawals of cash from ICICI Bank are still not clear but certain broad pointers emerge. A week after a mini-run of sorts started, ICICI Bank says that it is business as usual, attributing its predicament to mischievous rumour mongering. The Reserve Bank of India issued a communiqué supporting ICICI Bank. That was meant to reassure the bank's clientele. Liquidity support was promised but in the end it appears that the ICICI Bank did not need any specific outside help, even from the central bank.

ICICI Bank has done well in requesting Justice P. N. Bhagwati to conduct an enquiry. It is also hoped that the RBI too steps in to ascertain the circumstances leading to such massive withdrawals and even more importantly arrange to make public its findings. Only by adopting such transparent procedures can the RBI uphold the confidence levels in the financial sector. Unfortunately in the previous instance of panic withdrawals — from Global Trust Bank (GTB) in Hyderabad — the RBI promised to expose those behind the rumours but did not do so. Either its report is incomplete or is too speculative for general consumption. Or maybe because like ICICI Bank now, GTB recovered fairly quickly.

There are a few similarities but many more dissimilarities between the two cases. ICICI Bank and GTB are "new generation'' private banks, a small number of which came into being in the reform era. (Only after a long gap another new generation bank, the one promoted by Kotak Mahindra has just commenced business) Adequately capitalised and investing heavily in technology, these banks were expected to set new standards of banking excellence and in turn would influence the rest of the banking sector, made up of public sector banks, the "old'' private banks and the foreign banks. The new generation private banks were meant to be a class apart from the PSBs and the private banks while emulating foreign banks in technology as well as in certain niche areas. Almost a decade later the impact of the new private banks is being assessed. Importantly, there has already been a shakeout with consolidation happening at a furious pace

Interestingly, only ICICI Bank and GTB along with HDFC Bank looked like measuring up to their full potential at least in the initial years of the new banks. Soon, however, the dissimilarities among them became obvious. Whereas ICICI Bank and HDFC Bank could count on pedigree, GTB was unique in that it was the only new bank started by entrepreneurs. GTB's growth was explosive in the first few years but faltered in the face of allegations of imprudent share market exposure that became part of the Ketan Parekh led scam of 2001-02. ICICI Bank in contrast is best known for its aggressive attempts at espousing universal banking, a goal it is said to have achieved when its parent the ICICI Bank was merged with it. Earlier it took over Bank of Madura.

Nobody doubts the solvency of ICICI Bank or for that matter any other scheduled bank. Yet there was a panic reaction among its depositors allegedly set off by rumours and that dents the image of not just one bank but the entire financial sector. ICICI Bank has grown quickly to become the second largest bank in the country. Has the growth come at a certain cost to its image?

While the universal banking model it has adopted will take time to be evaluated, its other noticeable strategy of rapidly extending its customer base through the use of technology may be at the core of the recent happenings.

Simply put, ICICI Bank is attempting "mass banking'' — PSB style — while trying to project itself as a provider of high-class financial services. The bank that has the largest ATM network also claims to be big in Internet banking and phone banking and so on was apparently overwhelmed when its customers ran some of its machines dry. In subsequent press statements the bank took as much pains to highlight its efforts at replenishing cash in all its ATMs as on its financials.

There is little doubt that the image of ICICI Bank has suffered in the wake of the mini run. Banks as a class are tightly regulated. Public confidence in them ought to be higher than is the case with non-banking finance companies. It is going to be a tough job for all entities, the RBI included to restore faith in the system.

It looks certain that the business model assiduously practised by ICICI Bank, of virtually conducting banking transactions through machines, will come under scrutiny. Implicit in that approach has been the downgrading of the status of the human element, whether it is that of the manager or the counter clerk. Computerisation has led to a situation where sales persons sell standardised financial products. Bankers in the traditional sense apparently have no place. Inevitably the bond with the customers (not just high net worth individuals) is simply non-existent when machines rule the roost.

Incidentally, long queues before an ATM are not a sign of a bank's popularity even during more normal times.

Printer friendly page
Send this article to Friends by E-Mail

Business