The Hindu Business Line : The golden lining...

K.P. Padmakumar, who successfully turned around the fortunes of Federal Bank, believes that in this gold-loving country the future lies in making your investments in gold work for you.

Today he might wear two hats as the head honcho of two Kerala-based organisations offering financial services — Executive Director of the Muthoot Group and Chairman of Equity Intelligence, a portfolio management service (PMS). And, he had a very successful stint as the Chairman of Federal Bank between 1999 and 2004. But barely 17 years ago, K.P. Padmakumar too "used to have the herd mentality and lost money in the stock market because sometimes you buy a stock and want it to go up tomorrow!"

But then that was in 1988 when he directly started investing in equity; "some brokers would say some share is good and I would buy! Sometimes I made money and sometimes I lost but on the whole it was a loss," he recalls. Not only did he lose money in a blue chip like Tisco, but also in many small and mid-cap stocks. "There were many flashes in the pan and I don't even remember the names." The technology bust in 2000 too left him poorer. "I lost a lot of money in Satyam, Silverline Technologies and the guy in Chennai who got into trouble (DSQ Software). Subsequently, when I became the Chairman of Federal Bank, he came to me two or three times for a bailout that we couldn't give. Even then I believed that he would land into a deeper mess."

Padmakumar took a degree in agriculture in 1965 and joined FACT (Fertilizers and Chemicals Travancore), where he stayed for 18 months before joining the SBI as a probationary officer in 1968. At the SBI he spent 27 years, of which a highlight was a four-year stint as the personnel manager in offshore banking in Bahrain. He returned in 1989 and from 1990 to 1995 he was posted with SBI Capital Markets in the mutual fund segment. In 1995 he took voluntary retirement from SBI and joined Federal Bank as Executive Director and became Chairman in 1999.

When he joined Federal Bank in 1995, he started a portfolio account through Geojit Financial Services and "was very happy at the returns but once I became Chairman, I booked profit and got out on good governance standards. But that was a good experience."

Padmakumar points out that most of his colleagues in the mutual fund segment, either at SBI or UTI, joined private sector MFs. "I too had offers but destiny decided I should stick to core banking."

At the Federal Bank, as the ED, he found things in quite a mess. "To put it graphically, I had walked into an organisation that was moribund and plagued by Board-related issues. There was a lot of interference by the Board members in the day-to-day running of the Bank, the organisation culture and business focus were poor, and employee morale was low; we had 101 problems on hand," he says.

It was a high interest rate regime and in 1996-97 interest rates had shot up to 24 per cent level and Federal Bank had started lending to "undesirable sectors. You name an NBFC and the bank had a huge exposure to it. We were paying close to 20 per cent for NRI deposits, so naturally we had to create assets at 24 or 25 per cent and the NBFC sector was thirsting for funds and prepared to pay this kind of interest. So concentrated lending went into that sector."

With real estate booming and steel doing well, money was lent to these sectors too. In 1999 when he took over as Chairman, the Bank had recorded that financial year "a loss close to Rs 52 crore — its biggest loss — but we concealed that by dipping into the reserves."

"I took the employees into confidence and said till then they had enjoyed a lot of privileges and it was time to sacrifice some of them so that they could be restored with renewed vigour later."

They responded positively and the cost cutting began. Next came a refocus on business... technology and automation of branches, followed by an "attack on the cost of funds. We also started attracting low-cost deposits." Of course in the NBFC sector the bank had to book huge losses. But the other measures such as the introduction of ATMs in semi-urban and rural areas paid off, savings bank deposits grew annually by 60-65 per cent, and slowly the recovery began.

When the 2000 balance sheet reported Rs 46-crore profit, Padmakumar could take credit for a big turnaround story. With pride and satisfaction he says: "Last year when I stepped down, it was a profit of Rs 136 crore. The market cap of the stock went up; the stock price had fallen to a low of Rs 24 and it went up to the current level of Rs 600-plus, if you look at the pre bonus price."

Today he looks back upon his six-year term as chairman with pride; "but I couldn't have done it if the employees had not supported me to the hilt. To some extent the market too was favourable and thanks to technology we were seen as a new-generation bank." On the future of Federal Bank he says the present management should keep "the niche market strength intact, and it can still go places. It has a strong customer base which has to be kept intact."

On the intermittent rumours of Federal Bank being taken over or merged with a larger bank, he says, "I don't think this would be good for the bank. Even though consolidation is being talked about in the industry on an international platform, consolidation per se will not be the most desired course for Indian banks. Of course we need global-size banks and SBI should become one of the top 10 banks in the world. But this solution cannot be pursued for serving the Indian heartland. Even in the west, smaller banks are being established, becoming viable and growing. Even the Narasimhan committee says you should have some strong regional banks. In Kerala, this is the largest private sector bank and hurting its niche market strength will not be advisable."

He adds that thanks to customer support and loyalty, Federal Bank has "a tremendous resilience; competition has not hurt the bank in a high consumer society like Kerala. So its identity must be kept intact." But he concedes that even though Federal Bank "doesn't need a white knight, and there are weaker banks without hope which can be taken over, of course acquirers will want to do cherry picking!"

Asked if he would have succeeded in making such a big change to the fortunes of a public sector bank, he says: "I don't think so. Here I got a relatively clean canvas to draw on. In a private bank you are a Board-controlled entity and if you satisfy the control points the Board stipulates for you, you enjoy a lot of freedom and flexibility, which the public sector does not allow. Where the government is the major shareholder, it is impossible to think of less interference."

On the Muthoot Group, which is an NBFC, he says it is as big as a bank with 425 branches all over the country. "Their core business is lending money against gold and they are a big player in insurance distribution, foreign exchange, hospitality business, etc." On the tremendous interest in gold in Kerala, Padmakumar says, "On Akshaya Trithiya day, Rs 1,200 crore worth of gold was purchased in Tamil Nadu, but in Kochi alone the figure was Rs 120 crore. All the jewellers in town had to close doors and ask people to go away because they couldn't service the customers! Next to crude, we're importing gold but all this gold is going into the coffers of individuals and remains a non-earning asset. We want to make it a productive asset." He adds that gold loans are now looked upon mostly as a "desperation product people resort to when in trouble. We have to elevate it to a different plane and make it more meaningful for society."

As Chairman of Equity Intelligence, is he anxious about the northward journey of the equity indices?

"Yes, I do feel that the Indian market is getting close to being overvalued. But in terms of earnings growth, I see a potential for 20-25 per cent growth. As for the PE multiples above 15 per cent, we have to remember that in February 2000, we had come close to 30 PE. Then hot money was taking it up; but this time genuine money is taking it up. This makes the rally different."

He agrees that one cannot rule out the possibility of a bubble or a scam. "But essentially it's a question of liquidity. But if 65-70 per cent of market turnover is accounted by FIIs, that's the bigger danger I see. If they pull out, the base will go. But the silver lining is that, I believe, we're going to be a great growth story and that power is going to drive a lot of things. But corrections of a few hundred points are healthy and help to shed flab and then we could move up again. But investors have to be careful of small and mid-cap stocks."

On the nearly 100 per cent annual return from the EI PMS and the danger of investors expecting such returns all the time, Padmakumar says, "I've been sharing the concern of high expectations with the team. What worries me is that with the indices so high, those entering the scheme now will also expect similar returns and you can't repeat such a story unless you're very fortunate in picking up low value stocks."

Response can be sent to rasheeda@thehindu.co.in

Picture by the author

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