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.
*

Kumar - Organizational Turnaround of the Indian Bank /19

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.

20/ASCI Journal of Management, 35(1&2)

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