The Reawakening of Indian Bank-Turnaround Strategies of Indian Bank

Authors- AMAL REMESH & ADITH VENUGOPAL**

Abstract

Indian bank established in 15th August 1907, which was considered as one of the fastest growing bank. In the mid eightys it started facing a problem in the management of assets and liabilities due to indiscriminate growth of credit. The Government Of India and RBI decided on a restructuring plan in June 2000 under the leadership of Smt. Rajana Kumar who is the First woman Officer in the Public sector banks to become Chairman and Managing Director. The research is conducted by reviewing the book written by Smt.Rajana Kumar A New Beginning-The Turnaround Story of Indian Bank. This Research Paper seeks to ascertain the various structural, operational, cost control, marketing and initiatives to motivate its workforce that were done during the turnaround phase. Thus made it to achieve a sustainable turnaround with complete reengineering of its business mechanisms.

Keywords: turn around strategies

**MBA, Sree Narayana Gurukulam College of Engineering, Kadayiruppu

INTRODUCTIONIndian Bank was founded as a swadeshi bank on 15 August 1907, exactly 40 years before India got its independence, with an authorized capital of Rs 20 lakh. It is headquartered in Chennai (formerly known as Madras) in the south Indian State of Tamil Nadu, Indian Bank enjoyed a good customer base in the south. During the first year of operations, the Bank received deposits of Rs 2, 01,157 and made a profit of Rs. 5,505. As a bank backed by the government, Indian Bank continued to flourish and boasted of the trust it had been enjoying since the early 1900.It was among the first set of 14 banks that were nationalized on 19 July 1969.Indian Bank was considered as one of the fastest growing banks till the mid-eighties. It has 1,376 branches in India 982 in south, 147 in the east, 124 in the north, and 123 in the west. 469 branches are in rural areas, 353 in semi-urban areas, 324 in urban areas, and 230 in metros. 883 branches covering 90.48 percent of its business have been computerized. It has two overseas branches (Singapore and Colombo), and 240 correspondent banks in 72 Countries. Indian Bank has a 163 lakh customer base 146 lakh depositors and 17 lakh borrowers all over India. Through its trusted banking service it gained its brand equity, committed and emotionally attached customers who have been banking for generations with it. The 'nine decades of trust', suddenly came under threat in the 1990s, when the Government Of India and the Reserve Bank of India Reintroduced a new set of norms for the banking sector. The Banks CREDIT-DEPOSIT RATIO grew disproportionately to 64.6 percent as of March 1992 (as against 52.4 percent for all banks), causing illiquidity in the Bank which was due to progressive spurt in credit growth without matching growth in customer deposits. To meet statutory requirements it had to rely on high cost market instruments and borrowings from the call money market at exorbitant rates. This severely strained the Banks profit and profitability. As the Bank did not on its own take steps to contain credit growth even after it was cautioned by the Reserve Bank of India (RBI) more than once, the RBI imposed restrictions on further expansion in credit and pegged it to 7 August 1992 level. Despite this, credit continued to grow. The Bank started incurring losses from 1993-94

NATIONALISATION OF BANK In 1983 ethnic sectarian violence in the form ofanti-Tamil riotsresulted in the burning ofIndian Overseas Bank's branch in Colombo. Indian Bank, which may have had stronger ties to the Sinhalese population, escaped unscathed. IN 1990, Indian Bank rescued Bank ofTanjore(Bank of Thanjavur; est. 1901), with its 157 branches, based inTamil Nadu. A multi-crore scam was exposed in 1992, when then chairperson M. Gopalakrishnan lent13 billion to small corporates and exporters from the south, which the borrowers never repaid. Bank of Barodabought out its partners in IUB International Finance in Hong Kong in 1998. Apparently, this was a response to regulatory changes following Hong Kong's reversion to Chinese control. IUB became Bank of Baroda (Hong Kong), a restricted license bank.The history of the Indian Bank also changed, like that of other 24 banks changed forever. The main instrumentation of nationalisation was for a complete transformation for a rapid branch expansion, decentralization of authority to make credit decisions, appointment of lead banks to rejuvenate backward areas, priority sector lending, emphasis on lending to poorer sections of the society without being unduly rigid about security cover etc. As a result its branches going up from 239 in 1959 to 1000 in 1984. It was then the bank was nominated as one of the Lead bank under the Governments Lead Bank scheme, and was made responsible for surveying the potential , and arranging for grant of assistance to all viable projects, either through its own branch other agencies. The bank also entered in the arena of merchant banking with a view to providing specialized services to the corporate clientele in their expansion and diversification programmes and capital programmes market forays. This service offered corporate counselling and investment management. When the government felt the need for another set of banks to carter to rural areas, accordingly the set up Regional Rural Bank with major shareholding, the balance being met by the central and State Government.

Need for study

Turnaround of Indian Bank

Ranjana Kumar, as Chairman and Managing Director of Indian Bank, a 95-year-old bank owned by the Government of India, managed one of the most significant turnarounds in performance in the history of banking in India. With a negative capital adequacy of nearly 13%, Indian Bank was considered one of the weakest banks in the year 2000, when Ranjana Kumar took over. Under her stewardship, the bank has turned around successfully, achieving all the targets set under the restructuring plan, including bringing the gross NPA down from 43% to 15% in less than two years. Now we discussed about what are the lessons for the industry from such a turnaround in the face of tremendous competition?. What were the challenges faced by the bank, and what were the strategies that made this feat possible? The Indian approach to restructuring has traditionally been recapitalization by the government. In this case, however, the government decided to try a new approach, imposing conditions for the disbursement of funds for the first time in banking history. An MOU was signed in which, among other things, the unions and associations agreed to give the management a free hand, and funds were to be disbursed only after a profit was shown. This ensured accountability and put pressure on the bank to perform and, along with strategic decisions like merger of branches, delayering, streamlining of internal processes and aggressive marketing, contributed to the success of the restructuring plan. Innovative HR practices, training, and involvement and empowerment of the staff and officers ensured their buy-in and participation in the process.Indian Bank was facing problems since the late eighties in the management of its assets and liabilities. Due to progressive spurt in credit growth without matching growth in customer deposits, the Banks CD ratio grew disproportionately to 64.6 percent as of March 1992 (as against 52.4 percent for all banks), causing illiquidity in the Bank. It had to rely on high cost market instruments and borrowings from the call money market at exorbitant rates to meet statutory requirements. This severely strained the Banks profit and profitability. As the Bank did not on its own take steps to contain credit growth even after it was cautioned by the Reserve Bank of India (RBI) more than once, the RBI imposed restrictions on further expansion in credit and pegged it to 7 August 1992 level. Despite this, credit continued to grow. The Bank started incurring losses from 1993-94 (Chart-1).The trend: Operating/net profit (Rs./crores)

For 1994-95, even though the Bank reported a net profit of Rs.14.26 crores, the RBI identified short provisioning of Rs.298.14 crores. Hence, the actual position was a loss of Rs.283.88 crores. The Bank continued to show net loss for the years 1999-2000 and 2000-01. Thus, it incurred losses continuously for eight years before posting a net profit in 2001-02.

The Trouble with Indian Bank

The decline of Indian Bank was, by no means, a sudden phenomenon. The operations of the bank had been faulty for some time; by because of the financial and other forms of aid provided by the GOI, they did come to light. The loopholes were first exposed by the introduction of the new banking norms. Firstly, although the bank had a loyal customer base, it was thought that people stayed with Indian Bank only because of a lack of competitive alternatives. Customers, who felt that one PSB was as good as another, did not feel the need to move to other banks. However, with the opening up of the banking sector in the 1990s, private banks began offering more variety and flexibility in services. The rather primitive operations of Indian bank caused customers to drift away.

The report of the Working Group also suggested that some of the credit decisions taken by the bank in the early 1990s were cases of misfeasance. Former Chairman and Managing Director (CMD), M. Gopalakrishnan (Gopalakrishnan) was influenced by political considerations and granted loans to some parties who would otherwise not have qualified for loans. This made some of the loans granted during his tenure come under investigation. The granting of loans without due consideration for the credit-worthiness of the client also led to a steep rise in the non-performing assets (NPA) figure. In the mid to late-1990s, the gross NPA of Indian Bank constituted about 37 percent of the gross advances - an unacceptably high figure and the highest among public sector banks. Gopalakrishnan and some other employees of the bank were charge sheeted in the late 1990s. While corruption weakened Indian Bank, the operational aspects also left a lot to be desired. Indian Bank sponsored four Regional Rural Banks (RRBs)5under the lead bank scheme initiated by the RBI. The losses of these RRBs increased the liability of the bank. The bank also had three specialized subsidiaries - IndBank Housing Ltd, IndFund Management Ltd and IndBank Merchant Banking Services Ltd, in the areas of housing, mutual funds and merchant banking respectively. The poor functioning of these subsidiaries rendered the Rs 121 crores investment that the bank had made in them, a dead investment. Indian Bank also had a liability to invest additional amounts in these subsidiaries, to meet client obligations.

Human Resources, thought to be the life-blood of any institution, were in a poor shape at Indian Bank. Firstly, there were far too many people than were required and the ratio of the staff costs to the bank's total income was well over 23 - considerably higher than stronger banks like Oriental Bank of Commerce and Corporation Bank, where it was only around 10. The average age of the staff in the late 1990s was 47 and the staff lacked motivation and initiative. Productivity per employee was also relatively lower than better-placed banks. The bank needed an infusion of enthusiasm and freshness but there had been no recruitment for a considerable time. In some cadres, there had been no promotions for over 10 years, which compounded the problem of low motivation In addition to this; there were several management glitches, which put a spoke in the bank's progress. There was no system of succession planning and senior level officers were not groomed to take over responsibilities as Executive Director (ED) or CMD at the same bank. Because of this, senior managers did not associate themselves with the bank. The Board of Directors was rather complacent and did not often question the working of the bank. Appointments to the posts of ED and CMD were also irregular and the same people were given constant extensions.

A system-wide restructuring, therefore, became imperative to put Indian Bank back on its feet. In 2000, Ranjana Kumar (Kumar) was appointed as the CMD of Indian Bank. Kumar had begun her career at Bank of India (head office at Mumbai) and was, at the time of her appointment to Indian Bank, working as the ED of Canara Bank, another PSB based in the city of Bangalore. Her wide exposure in banking, believed the RBI and the GOI, qualified her to take up the challenge of turning the fortunes of Indian Bank.

Efforts at RestructuringThe Government of India put the Bank on a Restructuring Plan in June2000. The Plan was drawn up in-house, without any assistance from an outside agency, vetted by the Government of India and the RBI, and approved after several rounds of discussions. The Bank made a turnaround by earning net profit in 2001-02, in a short period of just two years, a year ahead of the target under the Restructuring Plan, and posted improved performance during the third year of the Plan (2002-03).Efforts at reviving Indian Bank began in July 2000 when the management, led by Kumar, submitted a plan to the GOI detailing the steps it proposed to take during the three-year restructuring period. Kumar requested the finance ministry for recapitalization funds, but the GoI decided to defer it until such a time as the bank showed a distinct improvement. Kumar began the restructuring by entering into a written agreement with the trade unions, seeking their cooperation on the three-year long initiative.Structural initiatives: Merger/rationalization: Of 119 branches with nearby branches. Introduction of VRS scheme: Relieving 3,295 employees. Organizational structure: Four-tier structure converted into three-tier structure. Implementation of credit intensive branches: To deal with corporate credit. Segmentation of branches: As corporate, commercial, personal, and rural. Subsidiaries: Sale of Indian Bank Mutual Fund, and taking over of IndBank Housing by the Bank.

Management of NPAs:

Comprehensive risk management system: By forming a central Asset Management Branch for focused recovery of NPAs; forming Asset Recovery Management Circle to give a thrust to recovery of high value NPAs, and for monitoring Asset Recovery Management Branch. Conducting recovery camps: 5,000 camps were conducted to bring about awareness among the NPA borrowers the Banks strong focus on recovery of dues. Pragmatic compromise policy: For not only effective follow-up of legal suits filed accounts but also verification of documentation, and strengthening of securities in NPA accounts. Enforcing securitization and reconstruction of financial assets and Security Interest Act: For constant discussion with NPA borrowers at circle and branch Level and fixing of recovery targets.Credit management:

Credit appraisal: Stringent credit appraisal system; effective standard assets monitoring and strengthening of documentation of large accounts. Structured products: Introduction of structured products. Credit intensive and corporate banking branches: Introduction of a system of credit intensive branches, and corporate banking branches. Restructuring of loans: Monitoring of symptoms at initial stage with borrowers before loans turn sick due to industry or management related problems. Formation of an exclusive Credit Risk Management Department: At the Head Office to measure and provide mitigation strategies. Vesting adequate discretionary powers: With field level functionaries. Employee motivation: Steps taken to remove fear psychosis among employees. Training: Conducting specialized training programs to upgrade the skills of staff.Accent on planning:

Planned growth of business: Resulting in improvement in net interest and noninterest income. Scientific analysis: Branch managers and staff made aware of the importance of cost of deposits, yield on advances, total income, total expenditure etc., at staff meetings addressed by the C&MD. Training: For planning officers at circle offices. Performance review: Month-wise review of performance of circle/ELBs, and fortnightly the larger circles. Conduct of review meeting of circles every quarter. Separate meetings with rural circles to focus on agriculture.HRD: Staff motivation:

Motivation: Facilitating staff regain self-esteem. Business review and interface: With branch managers by the C&MD at all circles clearly spelling out the areas of concern of the Bank. Performance review of circles/ELBs/VLBs at periodic intervals. Bringing about change management: Among staff through address by the C&MD at staff meetings at different circles. Cassettes prepared for spreading the C&MDs message faster among all staff members. Incentive system: Introduction of a system of incentives for good performing branches, and award of shield for best performing circles and branches. Meeting with unions and associations: At periodic intervals and sharing the Banks results and performance with them, thereby involving them directly in the growth. Promotion: Of 200 clerks of less than 40 years of age with higher qualifications and aptitude, on merit, for the first time. Promotions in the officer and clerical cadre in different scales implemented after a gap of many years.

Corporate governance:

A clear sense of direction: Inculcation of planning and profit consciousness at all levels. Greater transparency in day-to-day administration. Imparting the need for high ethical and moral standards in discharge of duties. Imparting the tenets of fair practices code, and the implications thereof among the senior officers of the Bank

Funds and Investment Committee: Chaired by the Executive Director, meets every day in the morning, to discuss developments in the call, money and forex market, movements in security market, Banks funds position etc., thus providing support to integrated treasury for its quick response to market developments and in decision making. Sub-committees of the Board: Audit Committee, Risk Management Committee, HRM Committee, and Technology Committee formed to guide the Bank and exercise control. Other committees: Top Management Committee and Monday meeting of head office executives; Head Office Audit Committee, ALCO, NPA Monitoring Committee, Settlement Advisory Committee, Committee of GMs, Credit Policy Committee, Credit Steering Committee, Deposits Monitoring Committee, Profit Monitoring Committee, and Executive Committee for Premises. Policies and systems: Clearly laid out policies and systems. Formulation of policies loan; integrated risk management; investment; ALM; placement and promotion; HRM; and compromise (for settlement of NPAs). Decentralization: Independence to field level functionaries. Higher discretionary powers at field level. Interaction with borrowers: Discussing with borrowers openly for determining interest rates. Conducting programs for executives of borrowing companies with the C&MD and senior executives addressing them.

Marketing:

Launch: Power account for young achievers to attract young clientele. Customer contact: Availed the services of MBA students to contact customers and market Banks products and to improve the Banks image. This is a very innovative step, the first of its kind in the industry. Customer care: Established evening counters in market places and round-the clock customer care center at Chennai, Mumbai, and Bangalore. Strategic alliance: With HDFC Standard Life and United India Insurance Company for distributing their products. Tie up with various business establishments in Chennai, Mumbai, Delhi, and Bangalore to make ATM card more attractive. Entered into international private remittances service arrangement with Union Bank of California to source NRI remittances. Tie-up with Air India for financing travel to Singapore. Tie-up with www.chennaiOnline.com for providing e-banking services, etc.

Soon after that, the structure of the bank was modiSfied to make operations simpler and to ensure speedy decision-making. The original four-tiered structure was modified into a three-tiered one, by doing away with the zonal office level. The three levels in the new structure were - head office, regional offices and the branches. This removed one level in the process of decision-making. Regional offices were also vested with more powers to enable them to take decisions at their level and consequently, provide better services to customers. Similarly, branch segmentation was also done to cater to the needs of various target markets. The branches were segmented into 4 categories - corporate, commercial, personal and rural. To create a more streamlined structure, several branches across the country were also merged. By 2003, 119 of the total 1400 branches in India had,,been,,merged.

In an effort to pare down excess staff and making the organization leaner, the bank implemented a Voluntary Retirement Scheme (VRS). Through the VRS, the bank shed over 3400 employees, bringing the staff number down to 22,400 by March 2003 from nearly 26,000 in 1999. The VRS cost Rs 96 crores, part of which was paid as cash and part as bonds. Indian Bank also adopted the practice of employing fresh MBAs for three months in summer, to provide a fresh view on things. After eight years of no recruitments, Indian Bank conducted a recruitment drive for probationary officers in 2003 and selected 250 people. The new officers were expected to join the bank by early 2004. The bank also recruited 58 specialist officers like MBAs and BEs to make operations more professional.To bring down the huge NPA levels that were bogging it down, the bank took advantage of the 'securitization' Act passed by the Indian Parliament, to foreclose and seize assets. It issued over 700 notices to defaulters and confiscated 12 properties. Restructuring also involved the sale of the Mutual Fund subsidiary to Tata AMC, a private mutual fund company, for around Rs 62 lakh. The housing subsidiary was taken over by the bank for restructuring and its merchant banking subsidiary was to be sold.The bank also entered into a five-way tie-up with other public sector banks for sharing of ATMs. (The other partners were Punjab National Bank, Bank of India, Syndicate Bank and United Bank of India). "With this, the number of ATMs that an Indian Bank customer would be able to access would go up to about 1, 000," said Kumar.6On its own, Indian Bank had set up 75 ATMs by the end of March 2003 and was planning about 30 more by the end of 2003. Plans were also on the anvil for the opening of 10 new branches across the country by the end of 2003. To keep up with private and foreign banks, Indian bank went on a technology drive and took up the computerization of its branches across India.

During the restructuring period, the bank began focusing on retail products, which it called 'structured loan schemes'. In 2001-2002, it introduced 12 new retail schemes for customers. During 2001-02, it disbursed close to Rs. 1,020 crores under these. Home loans were the major form of loans, followed by personal loans, trade finance and the like. To diversify its portfolio of services, Indian Bank also entered into an agreement with HDFC Standard Life, to sell the latter is insurance products. (Refer Exhibit-II for a list of the loans provided by Indian Bank in 2003).The official Indian Bank turnaround period was three years - 2000 to 2003. However, efforts started yielding fruit within the first year itself. The first ray of sunshine came in 2000-2001, when the bank posted its first operating profit of Rs 61.59 crore after years of losses. The turnaround finally happened, when Indian Bank posted its first net profit of Rs 33 crores in six years in 2001-2002. In fiscal 2002-2003, net profits increased by 468 percent to Rs 188 crores.(Refer, Exhibit-III).

In the Business Standard Annual 'Banker of the Year Survey' in 2003, Indian Bank was ranked second on the growth parameter, no mean achievement for a bank which was in the throes of losses half a decade ago. The honor was not surprising, considering the fact that over 25 percent of Indian Bank's business since its inception had been done in the three-year period between 2000 and 2003. (Out of the total business of Rs.40, 000 crore, Rs.11, 000 crore was brought in during the three-year period). There was also a considerable increase in deposits. Total global deposits increased to Rs.27, 015.92 crore in 2002-2003 from Rs.24038.84 crore in 2001-2002.By going on a loan recovery drive and exercising prudence in granting loans, the bank performed an admirable feat in reducing its gross NPA levels from a whopping 44 percent in 1999, to 12 percent in 2003. The net NPA also fell from around 16 percent to 6.15 percent during the same period. During the restructuring program, over Rs 600 crores of sticky loans were recovered.Encouraged by the progress of the bank, the RBI had released a recapitalization amount of Rs 1300 crores in 2002. With the infusion of the recapitalization funds, Indian Bank managed to reach a CAR level of over 10 percent, which was slightly higher than the minimum acceptable level.Encouraged by the progress achieved during the three years of restructuring leading to the turnaround, Indian Bank developed a new long-term vision document called Vision 2010. The document, which embodied the vision of the bank, looked ahead to the year 2010, and included plans for a public issue, which was likely to take place in early 2005.

EXHIBIT-IILOANS OFFERED BY INDIAN BANK (2003) Home Loans Educational Loan Professional Loan Vehicle Loan Consumer Loan IB Sentences IndSmart Salaried Class Loan IB Pensioners Loan Scheme Trade Finance Securities Loan Agricultural Loan Schemes Jala Nidhi Loan Scheme Annapoorna & Aroghya Scheme

Source: www.indian-bank.com