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The M&M-RBL Bank saga

Why M&M has invested in RBL and what does the bank look like
A little over a decade ago, on June 24, 2013, Mahindra & handsome returns over time. (Price-to-book value or
Mahindra Financial Services Ltd had an extremely vol- P/BV is the ratio of the market value of a company’s
atile day on the bourses after it announced its board’s share price over its book value of equity — the value of
decision of not applying for a banking licence. The a company’s assets).
announcement was made during trading hours. The At the current level of equity ownership, M&M is the
stock fell as much as 15.91 per cent to hit the day’s low third-largest shareholder in RBL Bank, behind Baring
of ~216.25, soon after the announcement. However, as Private Equity Asia (9.9 per cent) and British
bargain hunting emerged at lower levels, the stock pared International Investment (a little over 6 per cent).
some of its losses. While the M&M investors heaved a sigh of relief, one
M&M Financial Services decided not to proceed with gentleman must have been all smiles after this, RBL
the application for a banking licence after reviewing Bank MD and CEO R Subramaniakumar.
the guidelines issued by the Reserve Bank of India (RBI) In the not-so-distant past, the bank was not in the
for such an application, along with the clarifications best of shape. On December 27, 2021, the RBI had issued
issued by the central bank earlier that month. The com- a release after some depositors started withdrawing
pany said its board expressed full confidence in M&M money from the bank. It said: “There has been specu-
Financial Services’ plans and prospects for growth as lation relating to the RBL Bank in certain quarters which
an independent non-banking financial company appears to be arising from recent events surrounding
(NBFC). the bank… There is no need for depositors and other
The RBI guidelines provided for the conversion of stakeholders to react to the speculative reports. The
an NBFC into a bank but did not offer any flexibility in bank’s financial health remains stable.”
terms of meeting the reserve requirements — cash Subramaniakumar, former MD and CEO of Indian
reserve ratio and statutory liquidity ratio were applica- Overseas Bank, took over the reins at RBL Bank on June
ble from the inception of the bank. That was the stum- 22, 2022. He has addressed the trust deficit among the
bling block. regulator, employees and customers by clinically focus-
Fast forward to July 27, 2023. Parent Mahindra & sing on governance issues. A string of committees have
Mahindra’s (M&M) shares dropped 6.9 per cent in intra- been set up at different levels, bridging the gap between
day trading after the company said it had acquired a the board and employees. He has managed to arrest
3.53 per cent stake in RBL Bank Ltd and indicated that high attrition of staff; stabilised the bank; and, most
it might increase the stake up to 9.9 importantly, brought it back to the
per cent in the future. growth path.
M&M did not spell out the He is also exploiting the strength
rationale behind the share pur- of the bank’s banking correspondent
chase. “We have acquired a 3.53 per subsidiary, RBL Finserve Ltd. Earlier,
cent stake in RBL Bank as an invest- the two worked in silos — bank
ment at a cost of ~417 crore,” the branches focusing on raising deposits
company said in an exchange filing. and the subsidiary sourcing small
“We may consider further invest- loans. Now, they collaborate for every
ment, subject to pricing, regulatory business and, as this opens new pos-
approvals and required procedures. sibilities, RBL Bank adds to its pro-
However, in no circumstance will duct kitty.
it exceed 9.9 per cent,” it said. To be sure, RBL Bank was not a
Flashback to April 2021. M&M BANKER’S TRUST stretcher case. Even when the regu-
Managing Director (MD) Anish lator intervened, it was well capita-
TAMAL BANDYOPADHYAY
Shah, in his first interview as the lised and its financial position was
chief executive of the group, said satisfactory. It came under the RBI
the conglomerate could apply for a banking licence. glare years ago because of its insatiable lust for growth
“We feel that from a governance standpoint we will before putting in place the right risk-management and
meet all the criteria,” he told the Economic Times. credit-appraisal practices. A few corporate loans turned
However, the group was yet to decide whether its bad and the expansion in unsecured loan books made
foray into formal banking would be through acquisition the regulator wary.
of a private bank or by acquiring a public-sector bank. In FY20 and FY21, its growth was muted. Before that,
“The Mahindra group does not borrow from Mahindra microfinance loans were 12 per cent of its loan book.
Finance today. If anything, we actually lend to Mahindra The contribution of the unsecured credit card business
Finance sometimes, when required, and we put in the to its overall loan portfolio was around 20 per cent, the
capital earlier this year as well,” Shah said. highest in the industry.
Against this backdrop, the July 27 exchange filing As I write this column, credit cards continue to be
by the company made many of us believe that Shah around 24 per cent of its assets but the share of micro-
was walking the talk. As we were eagerly waiting for the finance loans has come down to around 8 per cent.
drama to unfold, the denouement happened too fast. Overall, the wholesale loans are 46 per cent of the total
On August 4, at an analysts’ call after announcing the book. While the average low-cost current and savings
June quarter earnings of M&M, Shah made it clear that accounts, or Casa, was around 37.3 per cent of the total
the company would not increase its capital allocation deposits in June, the portion of retail deposits had risen
in RBL Bank, unless it found a compelling strategic to close to 44 per cent. In the past one year, its gross
value in the bank. This was contrary to the earlier bad loans have come down to 3.22 per cent from 4.08
announcement of increasing the stake in the bank to per cent and, after provisioning, net bad loans have
9.9 per cent. dropped from 2.35 per cent to 1 per cent.
“This is an investment of ~417 crore today. It’s an By FY26, the bank plans to have three lines of busi-
investment in a sector that is the core sector for us, ness in equal proportion — wholesale, credit card and
financial services, a sector that we want to grow a lot microfinance — and new products such as education
more… This investment is in a sector in which we have loans, gold loans, small business loans, car and tractor
almost ~40,000 crore market cap... And this investment loans and personal loans. The worst seems to be behind
is really for us to understand banking in a lot more detail RBL Bank.
with a very long-term view — seven- to 10-year view. In his immediate past assignment, as an adminis-
There are no assumptions on our part today whether trator, Subramaniakumar oversaw the insolvency pro-
we want to get into banking or not. In fact, at this point cess of Dewan Housing Finance Corporation Ltd. In a
of time, we cannot and don’t want to….,” Shah had said, little over a year at RBL Bank, he has convinced the
adding: “At this stage, we don’t expect to go higher… At investors that his expertise goes beyond stress man-
some point in the future, if there is a compelling strate- agement.
gic reason, we need to evaluate in line with our capital
allocation policy….” The writer is an author and senior advisor to
Why did the company zero in on RBL Bank to under- Jana Small Finance Bank Ltd
stand the business of banking? Well, according to Shah, His latest book is Roller Coaster: An Affair with Banking
it’s a great investment opportunity with a one-time To read his previous columns, please log on to
price-to-book value, a very well-run bank with a good www.bankerstrust.in
management. He expects this investment to generate X: @TamalBandyo