Whatever business we pursue, for me it is key to have an open mind to embrace change either ahead of time or at least with the times. Let me take you back to 1890 New York to illustrate what I mean. Guess what was bothering New Yorkers, town planners and analysts at that time? Horse manure. In those days, there were no cars. As the city grew, there were more people, more houses, more horses and more horse manure. In 1890, some bright analyst made a forecast that by 1930 horse manure would be up to the third floor of buildings. The analyst obviously forgot that there is something known as change. In 1910, the automobile came into being and it was welcomed as an anti-pollution device, besides other things. Now, exactly 100 years later, the world looks at it differently — cars are today perceived to be among the most polluting devices. The point I am making is when you are sitting where we are today, we are thinking about many things in a manner similar to how the city of New York thought about horse manure in 1890.
Right from my early days of bill discounting to what we are today, we embraced change and evolved our strategy accordingly. We built our business bottom-up, piece by piece, thinking through the nitty-gritty at the grassroot level. Fortunately, we did this in a sector that also offered a great top-down opportunity.
After I passed out of Jamnalal Bajaj, I joined the family business, but then took a different path because I understood that while a family business teaches you to work with people as partners, the downside is that merit at times runs the risk of getting second-class treatment. While you can empathise with the family for the way they deal with business, I believed at the workplace meritocracy and professionalism is the key to success. So I branched out on my own.
I received a lot of help in my journey from Sidney Pinto and Anand Mahindra. I first met Mr Pinto at the office of HL Ficom, a firm then owned by Pradip Dalal. After our meeting, we couldn’t get a taxi back to our respective offices at Flora Fountain and so we walked back from the Ficom office at Nariman Point. As we walked, he told me, “Uday, think about doing stuff on your own. It’s a brave new world out there.” That sense of direction from him gave me the courage to move forward. As our association deepened, I realised Mr Pinto was a phenomenal combination of lawyer and merchant banker. He brought flair and a sense of entrepreneurship to our budding financial services company.
Right from the beginning, we tried to create a space for ourselves by striking a win-win for both borrowers and lenders. A friend from Bajaj had joined Nelco (the Tata group electronics company) and I learnt there was a huge imperfection in the Indian financial market where banks borrowed at 6% and lent at 17% to even AAA clients. That 1,100 basis point spread was pretty stunning — I am using “1,100 basis points” on purpose because spreads have narrowed so much now, that basis points matter. Moreover, the system was comfortable with that, so we jumped right into it.
Bill discounting, which is what I started with, had many avatars. First, I went to individuals who used to deposit money in banks at 6%. We gave them 12% for a Tata company or a Mahindra company risk. To companies, we lent at 16%. So we narrowed the spread to 400 basis points. Second, we evolved a product where we would take a bill guaranteed by banks to other banks for refinance. Third, thanks to support from people like Suresh Shroff and Justice Bhagwati, in those days we had a concept called trust funds where we pooled investor monies for investing in bills. There was a whole host of innovations around that and we grew the business to a very significant size.
In addition to bill discounting, we also used to do lease advisory. There were two leasing companies in the country at the time: First Leasing was based in Chennai and 20th Century in Mumbai. First Leasing was finding it tough to compete with 20th Century. I would work on lease financing transactions for Mumbai companies and take those deals to First Leasing and take a 1% fee.
It was during this time of growing my business that I met Anand Mahindra as we wanted to do business with Mahindra Ugine Steel. Anand was general manager, commercial, there, having just returned from Harvard. I approached him with a proposition on bill discounting, saying we would be able to fund it in 48 hours, which, in those pre-technology days, was pretty fast. That is how the relationship began and later he offered to take an equity stake in his personal capacity in the company we were forming.
Then came another very significant turning point that gave us entry into the securities business. I met Pradip Dalal’s son Rikeen at a wedding. During our conversation, he expressed his disinterest in his financial services business as it was not making enough money and said he wanted to focus on his manufacturing business (Ficom Organics). I said, “Instead of closing it down, why don’t you give it to me?” So we cooked the deal right there as I could see the power of retail distribution.
In 1993, Indian markets opened up for foreign investors. At the invitation of Mark Evans, who was the Asia head of Goldman Sachs at that time, I met Hank Paulson and Jon Corzine in Hong Kong for a dinner meeting — they just wanted to understand this new market. That meeting was very good and Paulson got excited enough to visit India in 1994 and by 1995 we had forged a joint venture. Interestingly, when we first met, Paulson and Corzine were impressed with me and wanted to hire me. Evans had to tell them, “Uday wants to build a business in India and is happy to partner, but not be taken over.” It took a lot of persuasion on our part to get attention from Goldman Sachs. Unfortunately, by the time they got really excited about India, which was in 2005, they wanted to control their destiny.
Ironically, by that time, I had realised that the financial services business is not a product; it is about a customer solution. You need to have a full chain to complete the menu you offer the customer — if you are good only at one, you run the risk of trying to push that product to the customer, which may or may not be in his or her interest. Since I was clear we wanted to be a “concentrated India, diversified financial services” company, we bought back our stake from Goldman Sachs. We could not afford to give away one arm when we wanted to become a complete financial services company. But then, we did learn a lot from Goldman Sachs when we were together.
Today, our approach to financial services centres on technology is radically different from the time we started. Technology spending is now the fastest growing item in the firm. I really think banks are becoming much more a technology play than people estimate it to be. In India, many bank branches survive because of the need for cash in businesses. Other than that, there is a big question mark on the future of bank branches. You need enough branches for people to feel comfortable that the bank exists. But 10 years from now, many more transactions will happen without the need for or existence of branches.
In my 25 years of building this business, I have learnt that embracing change is about creative death. In every organisation you need Brahma, Vishnu and Mahesh — the creator, preserver and destroyer. Most of the time when you start getting successful there are too many Vishnu’s and you will not find as many Mahesh’s. But to continue to be successful in a changing world you need all three. Getting this combination right is crucial and also contextual. At a particular time, you may need more of Mahesh, at another time you may need more of Brahma and some other time, more of Vishnu. It is not one fixed formula, but that is what management and leadership is about. For example, we had an investment in a company called Matrix that was a fascinating idea, but it came to a point where it was not working. We decided to exit, took the pain and moved on. As a firm grows and becomes more successful, exiting becomes more difficult; however, if you don’t cannibalise your own products, someone else will.
Over the years, there have been quite a few other important learnings, many of which we have made a part of our framework. In my early career, my emphasis was always on compliance and ensuring we were within the law because we were dealing with grey areas all the time. Compliance is still a touchstone for us.
The second thing is, if something looks too good to be true, it is too good to be true. Our mantra, therefore, is that when something looks very good, don’t go after it. Get into a business when it is out of fashion. The worst time to enter a business is when it is in high fashion.
Let me take you back to the mid-1990s, when non-banking financial companies (NBFCs) were in high fashion and you had some 4,000-odd players in the country. We were getting very uncomfortable with the macro scene then — rates were high, companies were struggling to repay and the economy was slowing. So we started to bring down our book dramatically. Only 1% of NBFCs survived that downturn. We took some pain as well but we survived. That drove the point that in business as in life, there is a very thin line between conviction and foolhardiness. If you are ready to back your conviction, go for it, but the risk is that if you are foolhardy, your conviction will hit you back. Making that distinction is very important.
From an investment banking perspective you need to offer what investors want at all times, but as a lender you need to decide if it makes sense for you. For example, in 2007-08, there was exuberance around the Indian infrastructure story — the media believed it, the policy makers believed it, investors wanted it, so we brought some of these companies to market. It was probably high risk but we got them in. Offering equities is like leaving to the consumer the choice of how much spice they want in their food — if they want a high risk bet with the upside and the downside of equities, the choice is really theirs — and as a cook I need to give them that. But as a banker, I need to decide how much spice is good for me; I did not like spice in my food during that time so we did not take exposure to infrastructure.
My most important realisation as a banker is something very basic. As a bank, say, we have ₹10 of capital and we borrow ₹100. If we lose ₹5 out of ₹110, we have lost 50% of our money; if we lose ₹10 out of ₹110, it’s time to go home. Bankers find it difficult to keep this principle in mind; most of the time, they believe they own ₹110. Equity is a very small portion of the total balance sheet of banks but bankers start believing they have control and ownership over all the assets. They don’t: it is other people’s money. If you go back globally and see the kind of lifestyles bankers lived, they lived at 50:1 leverage. They were living on borrowed money and on borrowed time. That arrogance comes from believing that you own all that leverage as your own money.
If I were put it very simply, the key principles in banking are really about three important human qualities. First, no excessive leverage, which is prudence. Second, no disruptively creative products, which is simplicity. Third, no arrogance. If you keep prudence, simplicity and humility as the three binding principles of banking, then through good and bad times you will be fine.