Ujjivan Small Finance Bank: The Inside Story Of A Tussle Between The Old And The New
The old guard that built a business from scratch; a new management brought in to take it to the next level; a disconnect between the two; an eventual parting of ways.
That story has played out across numerous businesses. It was repeated at Ujjivan Small Finance Bank Ltd. as Chief Executive Nitin Chugh resigned abruptly, citing personal reasons.
Chugh had replaced Samit Ghosh, who founded Ujjivan Financial Services, a microlender which then transformed into a small finance bank. Having led HDFC Bank Ltd.'s digital business for a while, Chugh was brought in to help the smaller lender modernise and grow in a rapidly digitising sector.
It didn't play out that way. Chugh left, leaving Ujjivan searching for a new leader.
For now, the baton will pass back to the old guard as founding member Carol Furtado has been appointed as officer on special duty at a board meeting on Wednesday. She will manage day-to-day affairs at the bank till Chugh's exit on Sept. 30 and will take over as interim CEO after that, subject to regulatory approval.
Ghosh declined to comment on the story. Chugh did not respond to multiple messages.
A Clash Of The Old And The New
It started well.
In May 2019, when Chugh joined Ujjivan Small Finance Bank as managing director and chief executive, he was expected to bring fresh energy to a 15-year organisation. Ghosh, on turning 70, had to step down as per RBI's rules.
Chugh treated Ghosh like a mentor, given the latter's 30-year long experience in banking and microfinance, recalls a former director on the bank's board, who spoke on the condition of anonymity. Ghosh guided him whenever needed, this former director said.
The initial transition was smooth.
Chugh continued the hands-on management style prevailing in the organisation. Practices such as regular check-ins between senior and junior employees, recognition for good work and perks to incentivise performance were all retained.
But the pandemic put pressure on the business and hence the management, this director said.
The gross non-performing asset ratio for Ujjivan Small Finance Bank rose to 9.8% as of June 30, compared with 7.1% in March. The bank's provision coverage ratio fell from 82% in June 2020 to 60% in March 2021. It rose to 75% at the end of the first quarter of FY22.
According to Emkay Global, the bank's total portfolio of risk, which includes NPAs, restructured loans and loans unpaid on due date, stood at 30% of the book as of June 30.
The rising delinquency rates, according to an official at the bank with direct knowledge of the matter, raised concerns about inadequate provisions.
The matter was raised by the parent company's board of directors; however, action taken by Ujjivan Small Finance Bank's management was insufficient, this official said.
"We have always been very conservative in provisioning. The provisioning over the last one year has moved up and down, which is a matter of concern at the holding company (Ujjivan Financial Services)," Ghosh told analysts last week, suggesting this was a point of strain.
Differences Over Crisis Management Approach
As Chugh got to work trying to manage asset quality, his style rubbed the old guard the wrong way.
In trying to push for improved collections, Chugh set tougher targets for mid- and entry-level staff.
Another former director on the bank board, who left earlier this year, said that this was necessary to enhance collection efficiency, which had deteriorated during the national lockdown. But the second wave and localised lockdowns curtailed the ability of staffers to undertake door-to-door recoveries, this person said.
To counter this, the bank pushed for higher collections through indirect routes such as digital payment applications and third-party agents.
While addressing analysts after announcing the quarterly results, Chugh said that nearly 16% of the collections in the April-Jun quarter came from digital channels, while 34-35% were through kirana stores and other touch points where customers could deposit their installments.
This did not sit well with the board of the holding company, which felt that the bank would lose touch with its microfinance borrowers, this director said.
Chugh was also focused on pushing up one key metric at the lender — profit per employee.
According to data collated by the Indian Banks' Association, Ujjivan Small Finance Bank reported a profit per employee ratio of around Rs 2 lakh in March 2020. Peers such as ESAF Small Finance Bank and AU Small Finance Bank were much higher.
This, too, became a reason for strife.
If there is indeed a culture mismatch, the fault lies with the selection committee at the bank, said independent banking analyst Hemindra Hazari. But, according to Hazari, there is a bigger question here—if high-yield microfinance lending is viable.
If large corporates and high-net-worth individuals struggle with high interest rates, how can we expect those close to the bottom of the pyramid to manage them? The sector must be subsidised by the state, as a commercial approach will eventually lead to problems. The notion that there is a pot of gold at the end of this rainbow needs a reassessment.Hemindra Hazari, Independent Banking Analyst
A Steady Trickle Of Resignations
Even before the Chugh crisis hit, there had been a steady trickle of exits.
When Ghosh and his team set up Ujjivan Financial Services in 2005, they were proud of the decentralised organisation they had built.
No cabins. An open office culture. Everyone working as one unit.
A similar culture was brought into the bank, when it was set up in 2017, the second director said.
Chugh, though, having worked at HDFC Bank for long, came from a more corporate environment. He wanted boundaries, clear delineation of duties and responsibilities.
The old guard, which was used to functioning as a combined unit, did not appreciate this corporatised culture, the second director quoted above said.
Over time, old-timers started to exit in a steady trickle.
The pace of exits picked up in recent months. Since January, the bank has seen six senior officials and five board members leave. Many of the seniors who resigned were part of the founding team at the bank.
Even beyond the top exits, churn was high.
According to a report by Kotak Institutional Equities on Monday, the attrition rate at Ujjivan Small Finance Bank has been higher than its peers including Equitas Small Finance Bank and Spandana Sphoorty Financial Services Ltd.
Ujjivan Small Finance Bank's employee base declined, from 17,841 in March 2020 to 16,571 in March 2021 and then to 16,102 in June, according its analyst presentation.
The Exit And Beyond
Eventually, what started out as a cordial relationship between Chugh and Ghosh, broke down. Chugh resigned, leaving Ghosh to firefight.
In comments soon after the resignation, Ghosh chose to focus on both asset quality and attrition as two areas that needed attention.
While Furtado will take charge for the time being, the bank's board will also initiate the search for a new chief executive, the bank said in an exchange notification. The board will finalise two probable candidates to run the bank and will submit them to the Reserve Bank of India for final approval.
BA Prabhakar is set to become the non-executive chairman of the bank. Ghosh himself will remain as a common director between the bank and the holding company, overseeing the leadership transition and the eventual merger of the two entities.
"The bank is undertaking an independent portfolio quality and process audit. We look towards streamlining the provisioning policy. We are confident of strengthening the organisation and emerge as a stronger Ujjivan," Ghosh was quoted as saying in the exchange notification.
It won't be easy, cautioned analysts at Emkay.
"Under the new management, the bank would look toward upfront stress recognition and accelerated provisioning, which means that it would reel under losses for some more time," said the brokerage house in its report.
Rebuilding and motivating the team will be critical so that the bank can recover lost ground and benefit from the possible recovery in asset quality and loan growth over the next 12 months, said analysts at Kotak Institutional Equities said. "Medium-term challenge will be to identify the next suitable CEO. While such transitions are rarely smooth, the presence of Mr Ghosh and his team provides comfort," the brokerage house said.