Catholic Syrian: God's Own Bank

A community bank in Kerala finds the church, a rival and a tycoon from Thailand all interested in its future

By N.S. Ramnath

Published: Apr 27, 2010 06:23:25 AM IST

Updated: Apr 27, 2010 08:28:33 AM IST

The tropical district of Thrissur in the heartland of Kerala has always attracted outsiders. It was here that Christianity and Islam entered India within years of their founding. But sitting right in the middle of this melting pot of cultures and heading a community bank that represents one of India’s oldest Christian denominations, V.P. Iswardas is in no mood to entertain outsiders. “My job is to focus on my customers,” the man who took charge as the managing director of Catholic Syrian Bank (CSB) last December, says. He is in the middle of a multi-pronged battle for the control of this community bank. Backed by little more than the benign presence of Jesus Christ in a portrait in his office, he is trying to ward off takeover attempts and protect the bank’s independence.

But outsiders, sure as hell, are interested in coming in. CSB has built an exclusive franchise in Kerala with total business of Rs.10,000 crore and 363 branches, reaching virtually every nook and corner of the Malayalam country. For banks and businessmen looking to dominate the financial sector of the state that gets the highest level of foreign remittances in India, it is a tempting buy.

Naturally, there has been no dearth of suitors. Just 80 kilometres from Iswardas’ office sits M. Venugopalan, CEO of Federal Bank. This larger country cousin of CSB has been trying to acquire it for the past two years in a bid to become the dominant bank in Kerala. It bought a 5 percent stake and waited for a larger stake. It found a heaven-sent opportunity when the Reserve Bank of India set a March 31, 2010 deadline for CSB’s largest shareholder, Sura Chansrichawla, to bring down his 24.5 percent stake to less than 10 percent. Here was a shareholder under compulsion to sell and a buyer eager to lap it up. For a while, it almost looked like CSB would become an apple in Federal Bank’s basket.

While further events have put the deal in a knotty situation, names of other Indian businesses and non-banking financial companies constantly crop up as potential acquirers of CSB. Its star-studded shareholders list includes the likes of engineering conglomerate Larsen & Toubro.

Obviously, all this attention irks Iswardas, who wants to retain the bank’s independence and the Catholic Syrian community in Kochi, backed by the church that wants it to retain its community identity. Their answer? To treble the business of the bank to Rs. 30,000 crore in two years, expand its footprint, create a presence in all states in the country and raise money from the market to fuel that growth. Iswardas hopes that this would discourage existing investors from selling out.

While in opposite camps, Iswardas and Venugopalan have one thing in common. Both have to struggle with their respective board of directors that may not always agree with their views. The CSB board will approve a deal at the right price, while Federal Bank’s board won’t allow Venugopalan to pay as much as he was willing to.

As if this wasn’t enough, a three-way stalemate has just emerged showing that the battle for CSB is far from over. Chansrichawla, who was talking to Federal Bank to sell his stake, went ahead and sold it to an entirely new set of investors.

With none of the three sides willing to yield an inch, a game of patience has begun. The big question is, who will blink first.

The Banker That Never Was
Not many in India have heard of Chansrichawla, a media-shy third-generation non-residend Indian based in Thailand. The affable Sikh held 24.5 percent stake in the bank. But given that Indian law doesn’t allow an investor to hold more than 10 percent in a bank, he sold 14.5 percent to 15 investors from India and abroad. This followed the lack of a deal in his talks with Federal Bank.

Here comes the twist. The share transfer is yet to be cleared by CSB’s board. The RBI asked the bank to check if these 15 investors were acting in concert. The apparent implication was that if they belonged to one group, their combined stake would again violate the law.

For Chansrichawla, this was not the way things were supposed to go. He came here in the 1990s, looking at investment opportunities. Banking was high up on Chansrichawla’s priority list. A generation earlier, his family tried to get hold of a bank (Bank of Ayudhia) in Thailand, but failed. As Thai economy became more liberal, it was left to his generation to enter and expand his family’s interest in banking, finance and insurance.

In 1994, CSB seemed to be a good pick, and he bought 36 percent stake from the Syrian Christian community, which originally promoted the bank. However, things were anything but smooth — there were court cases saying he flouted foreign exchange norms and there was stiff resistance from the church.

The 10 percent rule effectively ended his ambition to control a bank in India. He had to give up.

The Big Brother
From the day he took over the reins of Federal Bank five years ago, Venugopalan was unhappy with its size. He had just stepped down as the boss of Bank of India, which had 2,600 branches, over 10,000 employees and Rs. 150,000 crore of business. Federal Bank had about 420 branches, 6,000 employees and Rs. 23,000 crore of business at that time. It was a step down. For Federal Bank employees, he was “a big banker in a small bank.” So what? He would make the bank bigger. And acquire, if need be.

His first target was Lord Krishna Bank. The talks proceeded well enough and the two banks agreed in principle for a merger. But unions were against it, shareholders didn’t agree on the valuations, and he saw Centurian Bank of Punjab snatching away his prize. A year later, he did acquire a bank (Ganesh Bank of Kurundwad). It gave Federal Bank an additional 32 branches and a footprint in Maharashtra, but nothing of the size he desired.

Clearly, Chansrichawla’s predicament offered an excellent opportunity.

CSB would be an ideal fit. There would be no cultural issues, as both banks serve in the same market. Only about 16 branches would have to be relocated. A merger would make Federal Bank the biggest private bank in the south after ICICI Bank and HDFC Bank.

Venugopalan was ready to pay the price for strategic value. He offered a share swap in August 2009 under which shareholders of CSB were to get 1.9 shares of Federal Bank for every share they held. This valued CSB at Rs. 700 crore. The deal looked almost done.

But when Venugopalan took it to his board, the directors shot it down. They thought the price was too high. They got KPMG to do another valuation which put CSB at Rs. 400 crore. CSB shareholders didn’t agree. The deal got stuck in the crevice between expectation and offer.

To this day, Venugopalan insists that the logic for the merger holds good. Despite Chansrichawla’s sale of stake to a new set of investors, Federal Bank hasn’t walked away from CSB. It retains its 5 percent stake.
Federal Bank’s inherent growth must be some consolation to Venugopalan. The net worth has risen to Rs. 4,000 crore. The branch network is up to 670 from 420. But it could have been much better with CSB in the bag. He has set a goal to reach Rs. 100,000 crore in total business and a network of 1,000 branches by 2011. “Last two years were difficult because of slowdown in the economy and there was a set back. We will anyway work towards the goal.” The target did not include business through any acquisition. “That would have been a bonus,” he says.

Church, the Saviour
Iswardas’ office is on the fourth floor of CSB Towers, an undistinguished building surrounded by educational institutions — St. Thomas College, St. Mary’s college a couple of schools — not far from the heart of Thrissur. Some of these are run by Thrissur Diocese, a powerful Christian institution that has had a long association with the bank. The church continues to bank with CSB. The bank was started by the Syrian Christian community in Thrissur back in the 1920s.

John Chandy, a local businessman and the convener of Catholic Syrian Bank Protection Committee, an organisation that was formed when Chansrichawla picked up his stake in the bank, believes the board prefers a merger. He wouldn’t give any evidence, but that’s the general perception as well — but for the disagreement on valuation, the merger would have gone through.

That perception gains some credence from the fact that S. Santhanakrishnan, a former Federal Bank director, now sits on CSB’s board. A chartered accountant, he founded his firm Sridhar & Santhanam in 1977. A highly networked professional, he went to the board of Federal Bank when ICICI Bank had a stake in it. He was with Venugopalan as he grew it “from a small, regional Kerala bank to a good private sector bank.” He was a votary of the merger, and it’s widely believed he moved to the board of CSB to facilitate the merger, and make the transition easier. He was elected as the chairman of the bank recently (RBI approval is pending).

However, Santhanakrishnan says CSB has the potential to grow fast by itself. Soon, it would get ready to raise money from the market, even though it’s too early to say which route it would take. He declined to comment on other options.

T.S. Anantharaman, another board member and a shareholder in the bank, says, for the investors, it’s a question of price. “They would like to see some return on their investments.”

For Iswardas, ironically, the biggest support would come from the representatives of the Catholic Syrian community. The CSB Protection Committee is headed by the Archbishop of Thrissur Diocese. It’s a powerful institution there. Several churches, seminaries, trusts and institutions come under it. It runs 14 hospitals, six colleges, five professional colleges, training institutes, many schools. Father Raphael Thattil, Vicar General of the Archdeocese, says the bank isn’t a mere commercial entity. The diocese, he says, is dead against any merger or the loss of the bank’s identity.

The Committee had been working towards buying the shares back from Chansrichawla. The church had commitment of Rs. 250 crore from individual investors, Chandy says. But, again price would have been the issue.

If a merger becomes inevitable, his resort would be the courts. Litigants in Tamilnad Mercantile Bank, another community bank based in Tamil Nadu, succeeded in stalling annual shareholder meetings for seven years and stopped board members from taking over for two years.

Meanwhile, the task before Iswardas is to make investors see that the value of CSB shares keep rising on the back of robust growth. “It’s not about size,” Iswardas says, “Size of the bank comes second. I am looking at what the bank’s strengths are, and how best it can be used. If I do that, growth should follow naturally.”

Iswardas has divided the branches into three categories (rural, urban and semi-urban) and has given each of them a focus area (retail, corporate and small & medium enterprises, respectively). He set up a credit committee comprising of zonal and general managers to make decision-making faster. The 90-year-old bank has several third generation customers, and it would try to deepen the ties.

Meanwhile, CSB would look at industrial clusters to tap the SME business. Iswardas has asked RBI for permission to open 35 more branches. And for the first time, the bank would participate in campus recruitments. The plan is to touch Rs. 19,000 crore in deposits plus loans by 2011, and Rs. 30,000 crore by 2012.

It’s a tough task: What CSB plans to add in the next two years, State Bank of India adds in a month. It’s ambitious, admits Iswardas. “But look at our recent record. We managed to increase our advances by Rs. 1,250 crore in the last three to four months.” Can he grow the bank so fast when the industry itself has slowed down? A Deutsche Bank report says that loan growth is unlikely to scale previous peaks, even though it’s improving. Public sector banks have reduced their targets, it points out.

Illustration: Malay Karmalkar

He will have a tough time competing with bigger banks, which can afford to offer lower rates for corporate clients. His growth plans also assume business from new branches in new markets, where he wouldn’t have the advantages he has in Kerala (namely, loyal customers) and he will also have to compete with banks that are already entrenched in those markets. Some of the SMEs among his target segment are export driven, and growth is unlikely to pick up on that front. That leaves him with retail customers, a segment that’s doing well, but the competition there is increasing not just from NBFCs but also from bigger banks.

He now has to convince prospective investors that he can keep the momentum. That will be a bigger challenge.

As for Federal Bank, one opportunity may have passed, but the doors aren’t entirely closed. Chansrichawla’s last minute deal is yet to be approved, there is Anantharaman with his 12 percent stake that could still be targeted and at least some CSB backers may prefer to let a local bank take it over than an unknown investor.

Venugopalan, Iswardas, Chansriwala. Three determined warriors. Three different agendas. In the land where Apostle St. Thomas set foot 2,000 years ago and the country’s first mosque opened in the 7th Century, it remains to be seen whose prayers will be answered.

(This story appears in the 30 April, 2010 issue of Forbes India. To visit our Archives, click here.)