The M&M-RBL Bank saga

A little over a decade ago, on June 24, 2013, Mahindra & Mahindra Financial Services Ltd had an extremely volatile day on the bourses after it announced its board’s decision of not applying for a banking licence. The announcement was made during trading hours. The stock fell as much as 15.91 per cent to hit the day’s low of Rs 216.25, soon after the announcement. However, as bargain hunting emerged at lower levels, the stock pared some of its losses.

M&M Financial Services decided not to proceed with the application for a banking licence after reviewing the guidelines issued by the Reserve Bank of India (RBI) for such an application, along with the clarifications issued by the central bank earlier that month. The company said its board expressed full confidence in M&M Financial Services’ plans and prospects for growth as an independent non-banking financial company (NBFC).

The RBI guidelines provided for the conversion of an NBFC into a bank but did not offer any flexibility in terms of meeting the reserve requirements — cash reserve ratio and statutory liquidity ratio were applicable from the inception of the bank. That was the stumbling block.

Fast forward to July 27, 2023. Parent Mahindra & Mahindra’s (M&M) shares dropped 6.9 per cent in intra-day trading after the company said it had acquired a 3.53 per cent stake in RBL Bank Ltd and indicated that it might increase the stake up to 9.9 per cent in the future.

M&M did not spell out the rationale behind the share purchase. “We have acquired a 3.53 per cent stake in RBL Bank as an investment at a cost of Rs 417 crore,” the company said in an exchange filing. “We may consider further investment, subject to pricing, regulatory approvals and required procedures. However, in no circumstance will it exceed 9.9 per cent,” it said.

Flashback to April 2021. M&M Managing Director (MD) Anish Shah, in his first interview as the chief executive of the group, said the conglomerate could apply for a banking licence. “We feel that from a governance standpoint we will meet all the criteria,” he told the Economic Times.

However, the group was yet to decide whether its foray into formal banking would be through acquisition of a private bank or by acquiring a public-sector bank. “The Mahindra group does not borrow from Mahindra Finance today. If anything, we actually lend to Mahindra Finance sometimes, when required, and we put in the capital earlier this year as well,” Shah said.

Against this backdrop, the July 27 exchange filing by the company made many of us believe that Shah was walking the talk. As we were eagerly waiting for the drama to unfold, the denouement happened too fast. On August 4, at an analysts’ call after announcing the June quarter earnings of M&M, Shah made it clear that the company would not increase its capital allocation in RBL Bank, unless it found a compelling strategic value in the bank. This was contrary to the earlier announcement of increasing the stake in the bank to 9.9 per cent.

“This is an investment of Rs 417 crore today. It’s an investment in a sector that is the core sector for us, financial services, a sector that we want to grow a lot more… This investment is in a sector in which we have almost Rs 40,000 crore market cap… And this investment is really for us to understand banking in a lot more detail with a very long-term view — seven- to 10-year view. There are no assumptions on our part today whether we want to get into banking or not. In fact, at this point of time, we cannot and don’t want to….,” Shah had said, adding: “At this stage, we don’t expect to go higher… At some point in the future, if there is a compelling strategic reason, we need to evaluate in line with our capital allocation policy….”

Why did the company zero in on RBL Bank to understand the business of banking? Well, according to Shah, it’s a great investment opportunity with a one-time price-to-book value, a very well-run bank with a good management. He expects this investment to generate handsome returns over time. (Price-to-book value or P/BV is the ratio of the market value of a company’s share price over its book value of equity — the value of a company’s assets).

At the current level of equity ownership, M&M is the third-largest shareholder in RBL Bank, behind Baring Private Equity Asia (9.9 per cent) and British International Investment (a little over 6 per cent).

While the M&M investors heaved a sigh of relief, one gentleman must have been all smiles after this, RBL Bank MD and CEO R Subramaniakumar.

In the not-so-distant past, the bank was not in the best of shape. On December 27, 2021, the RBI had issued a release after some depositors started withdrawing money from the bank. It said: “There has been speculation relating to the RBL Bank in certain quarters which appears to be arising from recent events surrounding the bank… There is no need for depositors and other stakeholders to react to the speculative reports. The bank’s financial health remains stable.”

Subramaniakumar, former MD and CEO of Indian Overseas Bank, took over the reins at RBL Bank on June 22, 2022. He has addressed the trust deficit among the regulator, employees and customers by clinically focussing on governance issues. A string of committees have been set up at different levels, bridging the gap between the board and employees. He has managed to arrest high attrition of staff; stabilised the bank; and, most importantly, brought it back to the growth path.

He is also exploiting the strength of the bank’s banking correspondent subsidiary, RBL Finserve Ltd. Earlier, the two worked in silos — bank branches focusing on raising deposits and the subsidiary sourcing small loans. Now, they collaborate for every business and, as this opens new possibilities, RBL Bank adds to its product kitty.

To be sure, RBL Bank was not a stretcher case. Even when the regulator intervened, it was well capitalised and its financial position was satisfactory. It came under the RBI glare years ago because of its insatiable lust for growth before putting in place the right risk-management and credit-appraisal practices. A few corporate loans turned bad and the expansion in unsecured loan books made the regulator wary.

In FY20 and FY21, its growth was muted. Before that, microfinance loans were 12 per cent of its loan book. The contribution of the unsecured credit card business to its overall loan portfolio was around 20 per cent, the highest in the industry.

As I write this column, credit cards continue to be around 24 per cent of its assets but the share of microfinance loans has come down to around 8 per cent. Overall, the wholesale loans are 46 per cent of the total book. While the average low-cost current and savings accounts, or Casa, was around 37.3 per cent of the total deposits in June, the portion of retail deposits had risen to close to 44 per cent. In the past one year, its gross bad loans have come down to 3.22 per cent from 4.08 per cent and, after provisioning, net bad loans have dropped from 2.35 per cent to 1 per cent.

By FY26, the bank plans to have three lines of business in equal proportion — wholesale, credit card and microfinance — and new products such as education loans, gold loans, small business loans, car and tractor loans and personal loans. The worst seems to be behind RBL Bank.