ASCI JOURNAL OF MANAGEMENT 35(1&2), 18-27 Copyright 2006-Administrative Staff College of India.

RANJANA KUMAR*

Organization Turnaround of the Indian Bank

Considered as one of the fastest growing banks till the mid-eighties, Indian Bank began facing problems in the management of its assets and liabilities. The Government of India put the Bank on a Restructuring Plan in June 2000. This case study presents an account of various structural, operational, cost control, marketing, and motivational initiatives during the three years of the Restructuring Plan, which enabled it to achieve a sustainable turnaround with overall reengineering of its business performance, and enhanced its ability to face future challenges.

Indian Bank was founded as a swadeshi bank on 15 August 1907, exactly 40 years before India got its independence. 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 computerised. 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. The Banks strength is its brand equity, and committed and emotionally attached customers who have been banking for generations with it. A Peep Into the Banks Past 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
* Vigilance Commissioner, Central Vigilance Commission, Government of India (vc2@cvc.delhi.nic.in). She is the former Chairman & Managing Director of Indian Bank and National Bank for Agriculture and Rural Development. This paper is based on the K.L.N. Prasad Memorial Lecture delivered by the author at the Administrative Staff College of India, Hyderabad, on 30 December 2004.

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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 (Table-1).
Table-1

The trend: Operating/net profit (Rs./crores)

Year 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 Operating profit/loss 49.78 75.12 -223.68 -138.36 -209.50 -163.23 Net profit/loss -390.65 -283.88 -1336.40 -389.09 -301.50 -778.50 Net worth 291.61 391.55 -650.86 -1044.37 399.66 -283.25

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. Based on a study made by ICRA, Indian Bank submitted a Strategic Revival Plan to the Government of India in 1997. The Bank was re-capitalized by a sum of Rs.1,850 crores in 1997-98 and in 1998-99. Earlier, it had received a sum of Rs.645 crores as capital from the Government of India. However, the Banks performance did not improve, and the entire capital infused by the Government of India became sunk capital. In contrast to a spurt in credit up to 1995, there was complete internal squeeze on credit expansion since 1996, the impact of which was as follows:
Loss of good existing customers: Many existing accounts were made to become NPAs (non-performing assets). Huge provisioning had to be made for these accounts. Gross NPAs shot up to 44 percent of total advances. Fall in earnings: Fall in income earning assets; shrinkage in non-interest income; and income unable to cover expenditure. Loss of prestige: In the market due to out of market focus. Market share in advances fell to 1.90 percent from 3.79 percent in 1992. Fear psychosis: Staff affected by fear psychosis under suffocating environment. Decision-making process crippled; staff became stale, and failed to update their knowledge and skills.

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Loss of business opportunities: At a time when the market offered good scope.

Position at the Time of Introducing Restructuring Plan In October 1999, the Management Advisory Group under the Chairmanship of Mr. Deepak Parekh, a management consultant and eminent banker, with three other members Mr. S.K. Kulkarni, Former MD & CEO, Larsen & Toubro Ltd., Mr. Ram K Gupta, Former MD & CEO, State Bank of Patiala, and Mr. Dileep Chokshi, Chartered Accountant was constituted for suggesting corrective action for improving in the Banks performance. The Group studied the affairs of the Bank and came out with a detailed report. Excerpts of the observations made by the Group in their Report is as follows:
Ways need to be found to revive the Bank, although it is going to be an uphill task given the rut in which the Bank has fallen because of neglect, mismanagement and total absence of accountability over the years. The Bank enjoys good brand equity and has adequate infrastructure. These positive aspects need to be leveraged to pull the Bank out of the morass. The starting point in a turnaround is the competence, will and determination of the top management team. The task before the Board/Government of India is to select a new CMD who should possess missionary zeal, conviction, courage and foresight/experience to carry through the challenging task. He should be charged with the responsibility of turning around at all costs and vested with adequate discretion/maneuverability to choose a cohesive team. In conclusion, we would like to reiterate that the Bank is in a dire state. It is unfortunate that things have been allowed to deteriorate to this extent. Even after recapitalising in the past, there was lack of effective follow up action. The revival of the Bank at this stage is going to be a Herculean task. The most crucial aspect of the turnaround would be finding a right person with requisite zeal and credential to head the Bank giving adequate freedom to choose his top management team, from within or from outside, consistent with public sector discipline as far as possible. The patient is in the ICU, in a critical condition. The diagnosis is fairly clear. What is needed is multiple surgeries and massive blood transfusion. There is no time to lose.

The deficiencies in the Banks performance in terms of business strategy prior to restructuring, among others, include lack of direction in business strategy; high level of NPAs, and provisions made under prudential norms; excessive credit growth between 1988-95; large exposure to risky sectors

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like construction, film industry, hospitals, educational institutions, etc.; inadequate credit appraisal resulting in accretion of poor quality assets over a period of time; low focus on profitability resulting in high cost of deposits, excessive dependence on volatile and costly inter-bank money market due to high CD ratio and high operating costs; freeze on lending during 1996-99, cutting sharply the interest earning assets; all the three subsidiaries becoming a drag; and filing of public interest litigation against the Bank in the Supreme Court resulting in periodical and repeated adverse media reporting, and negative publicity. From the perspective of human resource development, deficiencies were noticeable in weak human resources development, and non-upgradation of skills to match changing needs; nonexistence of an objective promotion and transfer policy, and promotions not given regularly; nonexistence of corporate governance, and transparency in management; accountability and fear psychosis among staff due to handing over of a large number of avoidable cases to the Central Bureau of Investigation, and consequently, low morale and lack of will to take decisions; and discouragement of assertiveness, and curbing of managerial freedom. Restructuring Plan and Re-capitalization The Government of India put the Bank on a Restructuring Plan in June 2000. 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). The Government of India infused the first tranche of Rs.1,300 crores by end March 2002, 22 months after initiation of the Restructuring Plan, upon the Chairman & Managing Director (C&MD) and the Executive Director signing an MoU with the Government, the first of its kind in public sector banking, for achieving the targets under the Restructuring Plan. The second tranche of Rs.770 crores was infused only in February 2003, after the Government of India and the RBI watching the Banks performance for 35 months. During the three years of the Restructuring Plan, the Bank could achieve consistent growth in business and also a sustainable turnaround, due to initiation of various structural, operational, cost control, marketing and

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motivational strategies, and strengthening of the planning and monitoring system in the Bank. These strategies have brought about overall reengineering of the Banks business performance and enhanced its ability to face challenges in the future. The highlights of systems-based initiatives implemented under the Restructuring Plan are as follows:
Structural initiatives: Organizational structure: Four-tier structure converted into three-tier structure. Segmentation of branches: As corporate, commercial, personal, and rural. Merger/rationalization: Of 119 branches with nearby branches. Implementation of credit intensive branches: To deal with corporate credit. Subsidiaries: Sale of Indian Bank Mutual Fund, and taking over of IndBank Housing by the Bank. Introduction of VRS scheme: Relieving 3,295 employees. 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. 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.

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Enforcing securitisation 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. Frequent monitoring and meeting of volume NPA borrowers at top management level: Thrust on recovery from hardcore NPAs; focus on monitoring of standard assets, and restructuring of loans in eligible cases to check slippages.

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. MoU system: Whereby branch managers, circle heads, and head office executives commit to achieve certain minimum level of business growth, and profit. Focus on market share: Of circles/branches and market penetration ratio or per branch market share (based on data furnished by the RBI) Altering planning strategy: Planning strategy altered from trend-based growth to potential-based growth.

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.

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Overseas branches: Framing a policy for placement of officers in overseas branches. HRD study: Committee of Directors constituted to study HRD in the Bank. Executive Committee: For selection of managers to bring in joint wisdom. Sub-committees of the Board: Audit Committee, Risk Management Committee, HRM Committee, and Technology Committee formed to guide the Bank and exercise control. 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. 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. 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 Good HR discipline and team building: Through motivation and skill upgradation through training. 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.

Corporate governance:

Technology upgradation: Deposits and credit information system: Comprehensive deposits and credit information system. Branch computerization: 589 branches computerized achieving coverage of 78 percent of the business. Provision of computers to 565 rural and semi-urban branches. ATMs: 75 ATMs; any branch banking offered through 47 online ATMs.

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Others: Implementation of electronic data interchange scheme with Sea Customs and Chennai Port Trust; thrust on computer vigilance and security.

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-theclock customer care centre 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 cards 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.chennai online.com for providing e-banking services, etc. Cash management services: Revised and made more competitive. Mass campaign: Involving all staff members to market structured credit products, and improve low cost deposits. Marketing cadre: Selection and placement of a new cadre of fully equipped marketing officers.

Impact of Systems-based Initiatives The impact of systems-based initiatives was growth in business, profit, and profitability during the Restructuring Plan (Table-2).
Table-2

Performance improvement (in Rs./crores)

Key ratios Operating profit Net profit Capital adequacy Net NPA (%) Cost of deposit Net interest income March 2000 23.80 -427.00 Negative 16.18 7.90 379.94 March 2001 March 2002 March 2003 61.59 -274.00 Negative 10.07 7.73 495.21 307.15 33.22 1.70 8.28 7.28 531.05 590.25 188.83 10.85 6.15 6.42 820.39 March 2004 802.46 405.75 12.82 2.71 5.41 1117.06

In 2002-03, the Banks business crossed Rs.40,000 crores; operating profit up from Rs.24 crores in 1999-2000 to Rs.590 crores for 2002-03 and net profit at Rs.189 crores against a loss of Rs.427 crores. The net worth improved

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to Rs.1,287 crores from a negative of Rs.715 crores; CRAR reached 10.85 percent from negative of 11.64 percent; net NPA ratio came down to 6.15 percent from 16.18 percent; and return on assets improved to 0.65 from a negative of 2.14. The business per employee reached Rs.179 lakh from Rs.111 lakhs with 22,000 committed, talented and reenergized staff (3,295 staff members were relieved under VRS). 78 percent of the business was computerized from 36 percent earlier. During 2003-04, the total gross business touched Rs. 45,379 crores (deposits Rs. 30,444 crores and advances Rs.14,935 crores); operating profit was up by 36 percent (Rs.802.46 crores); net profit up by 115 percent (Rs. 405.75 crores); capital adequacy improved to 12.82 percent against 10.8 percent; net NPA ratio down to 2.71 percent from 6.15 percent; return on assets improved to 1.21 percent from 0.65 percent; and business per employee improved to Rs.205 lakhs from Rs.179 lakhs. The Bank had on its rolls 21,908 committed, talented and re-energized staff. It began preparing a Centenary Plan 2004-07 to reach greater heights Conclusion Indian Banks performance under the Restructuring Plan has been quite gratifying. This is evident from the fact that the Bank, during this period, has improved its performance significantly in all the key parameters as compared with the performance on these parameters (Tables-3 to 5) during the immediate three-year period prior to the commencement of the plan. It is to be noted that this performance was made possible by the same set of staff in the Bank, as there was no recruitment for the past several years and 3,295 staff were relieved under VRS in the first half of 2001.
Table-3

Banks performance: Business growth

Domestic 1. Deposits Savings 2. Credit (non-food) 3. Investments 4. NPA reduction A* Amount (Rs./crores) 4814 1411 588 3382 163 B** Amount (Rs./crores) 8362 2641 2728 6174 1291 Improvement (B-A) Amount Percentage (Rs./crores) 3548 1230 2140 2792 1128 73.70 87.17 363.95 82.55 692.02

*A Growth prior to Restructuring Plan (April 1997-March 2000). **B Growth during Restructuring Plan (April 2000-March 2003).

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Table-4

Banks performance: Working results

Global position 1. Total income Interest Non-interest 2. Expenditure 3. Operating profit A* Amount (Rs./crores) 5660 4988 671 6008 -349 B** Amount (Rs./crores) 8269 6926 1343 7310 959 Improvement (B-A) Amount Percentage (Rs./crores) 2609 1938 672 1302 1308 46.10 38.85 100.15 21.67

*A Growth prior to Restructuring Plan (April 1997-March 2000). **B Growth during Restructuring Plan (April 2000-March 2003). Table-5

Banks performance: Key viability ratios

Ratio CRAR Return on assets Operating profit to total working funds Net interest margin Cost income Staff cost to non-inter -est income plus all other income Coverage 1999-2000 -11.64 -2.14 0.11 1.87 96.36 75.32 -11.9 2000-2001 -13.60 -1.25 0.25 2.24 92.35 73.68 -8.91 2001-2002 1.70 0.13 1.14 2.20 70.27 54.51 -2.14 2002-2003 10.85 0.65 1.93 2.95 56.13 42.82 1.69 2003-2004 12.82 1.21 2.39 3.65 56.96 46.27 3.75

The success story of Indian Banks strengthening operations through restructuring is in consonance with its vision to become the best bank in the country. The fact that AC Nielson ORG-MARG Survey published in The Economic Times ranked Indian Bank as number one among south based service brands and 13 among Indias top 50 most trusted service brands is evidence of the fact that it is poised to reach this goal.