Case Study

Financial Sector Reforms :

Impact on Indian Bank and its Turn Around

The case discusses the turnaround of the Indian Bank, a prominent public sector bank
based in Chennai, a south Indian city. The Indian Bank was established in 1907 and was
nationalized by the Indian Government in 1969. The bank functioned reasonably well with
the aid of the government, till prudential norms were introduced for public sector banks in
1992. While the new norms caused most of the public sector banks in India to falter, the
Indian Bank posted an industry record loss of Rs 1336 crore in the fiscal year 1995-1996. In
2000, the bank undertook a comprehensive restructuring program under the guidance of
Ranjana Kumar, known in Indian banking circles for her ability to turnaround hopeless
banking situations.

After a restructuring program that involved considerable changes in structure, operations and
human resources, the Indian Bank managed to turnaround by posting its first net profit in six
years for the fiscal year 2001-2002. Plans were also on the anvil for a public issue in 2005. In
subsequent years the Performance of the Bank had been satisfactory on important parameters
along with Expansion and development focus.

Strong Observations :

The case of Indian Bank is a case of political blunder. The solution is not closing down the bank
but stern action against the defaulters so that repayments are made. This is the way to serve the
interests of the depositors."

- Gurudas Dasgupta, CPI Rajya Sabha member in 2000.

"During the three years of the restructuring plan, the bank could achieve
consistent growth in business and also sustain its turnaround due to initiation of
various structural, operational and cost control measures. The bank has also
worked on marketing and motivational strategies and strengthened its planning
and monitoring systems."

Mrs. Ranjana Kumar, chairperson and managing director, Indian Bank in 2003.

Indian Bank Achieves a Turnaround

In mid-2002, Indian Bank, a prominent public sector bank (PSB) in India, posted a net profit of
Rs 33.22 crore3 for the fiscal year 2001-2002. This marked Indian Bank's return to the black after
being in the red for six consecutive years, following an industry record loss of Rs. 1336.4
crore in the fiscal 1995-1996.
In 1999, Indian Bank was formally recognized as a weak bank by the Verma Committee, set
up by the Government of India (GoI) earlier that year. Following this, the bank embarked on
a comprehensive restructuring program, under the leadership of Ranjana Kumar, who was
known in the Indian banking circles as the "Turnaround Queen" for her unique ability to
create something worthwhile out of the most hopeless banking failures.

The restructuring process, eventually led to the turnaround of Indian Bank in 2002. By 2003,
the bank was looking forward to a promising future. Analysts said that the turnaround of the
Indian Bank was one of the most successful turnaround cases in the history of Indian
Banking.

Background Notes

Indian Bank was set up as part of the Swadeshi Movement in 1907. Incorporated on March 5,
1907, with an authorized capital of Rs 20 lakh, the Bank commenced operations on August 15,
the same year.

During the first year of operations, the Bank received deposits of Rs 2,01,157 and made a profit
of Rs. 5,505.

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. As a bank backed by the government,
Indian Bank continued to flourish and boasted of the trust it had been enjoying since the early
1900s.

The 'nine decades of trust', suddenly came under threat in the 1990s, when the GoI and the
Reserve Bank of India (RBI) introduced a new set of norms for the banking sector. The
once respected bank found itself with the ignominious distinction of being classified as one of
the three weak banks in India, alongside UCO Bank and United Bank of India.

The Indian Banking Sector

The GoI realized the importance of a strong banking sector for the development of the country
and gave due importance to banking. Before India's independence in 1947, banking was
essentially an informal, local process, with moneylenders playing a prominent role. Banking
institutions were usually private bodies and operated at the local level.

After 1947, the RBI and the State Bank of India (SBI) played a prominent role in the Indian
banking sector along with other private banks. In keeping with the country's principle of
socialism, the GoI undertook nationalization of several private banks in 1969. In the first phase
of the nationalization program, 14 banks were taken over by the government.

The second phase of nationalization was initiated in 1980, when six other banks were made
PSBs. This brought the number of PSBs to 28 - 20 nationalized banks and the eight associate
banks of SBI. In 1993, the New Bank of India merged with the Punjab National Bank to form a
single entity, bringing down the number of PSBs to 27.
Besides PSBs, private banks, foreign banks, Regional Rural Banks (RRBs) and cooperative
banks also formed a part of the banking sector. There were also specialized financial institutions
like the Industrial Development Bank of India (IDBI), Industrial Finance Corporation of India
(IFCI) and the National Bank for Agriculture and Rural Development (NABARD), which
provided loans and finance to certain sectors.

With branches numbering well over 60,000 and deposits of Rs 1, 10,000 crore, PSBs held a
combined market share of 90 percent by the early 1990s. One important reason behind the
continued success of PSBs was the assistance and backing of the government. According to
analysts, most PSBs depended on the government for their additional capital requirements and
received regular infusion of funds to maintain capital adequacy. Apart from a few cases, where
additional capital was needed to support a growing volume of business, most of the banks
depended on additional funds to sustain their regular business, which was on the decline because
of chronic weaknesses in the banks...

The Trouble With Indian Bank

Analysts felt that the decline of Indian Bank was not a sudden phenomenon, but rather a result of
weaknesses building up over the years. The operations of the bank had been faulty for sometime,
but because of financial and other forms of aid provided by the GoI, this did not come to light
earlier.

The loopholes were exposed by the introduction of the new banking norms in 1992. First, though
the bank had a loyal customer base, analysts felt that people stayed with the 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 obsolete systems of operation at the
Indian Bank caused customers to drift way.

The report of the committee also suggested that some of the credit decisions taken by the bank in
the early 1990s were faulty...

The committee developed a set of 7 parameters under three major heads, to classify the
PSBs into three categories and suggest measures for improvement accordingly. The
categories were as follows -

* Category I; Banks where none of the seven parameters were met

* Category II; Banks were all the parameters were met and

* Category III; Banks were some of the parameters were not met.
The Options

The Verma committee pondered over the various options available to the Indian Bank. It decided
that closure was not advisable because of the extremity of such an action.

The committee felt that the cost of closure would be too high for the depositors, clients and
employees of the bank and it would have adverse consequences on too many people. Merger with
a healthier institution was also ruled out because of the possible undesirable consequences of
merging a sick unit with a healthier one. The Indian banking sector had witnessed only one
merger between PSBs - between PNB and New Bank of India in 1993. This merger, however, was
not successful. PNB, a strong bank with an uninterrupted record of profits, suffered a net loss of
Rs. 95.90 crore in 1996. The bank also had to face litigation and other problems, especially with
regard to service conditions of the staff taken over from the New Bank of India...
Closure, merger or rehabilitation, summed up the options available to the ailing Indian
Bank in 1999, when the Working Group, set up by the Reserve Bank of India (RBI)1 in
consultation with the Government of India (GoI), submitted its report on weak banks. On
considering the options, the Group did not favor closure because it believed that the cost of
closure, to depositors, clients and employees of the bank, would be too high.

Merger was ruled out because of the un-viability of merging a sick entity with a healthy
one. Besides, the lone merger experience in the history of Indian public sector banks
(PSBs) (between the Punjab National Bank and New Bank of India in 1993) was not a very
positive one.

Rehabilitation through privatization did not seem possible because of the condition the bank
was in, and the consequent remoteness of the chance that a private investor would be
willing to invest considerable amounts to help it recuperate. Consequently, the only
alternative was to restructure Indian Bank, to help it achieve a turnaround.

Efforts at Restructuring

Efforts at reviving the Indian Bank began in July 2000 when the management, led by Kumar,
submitted a plan to the GOI with details of the steps it proposed to take during the three-year
restructuring period. Kumar requested the finance ministry to provide recapitalization funds, but
the government decided to defer it till 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. Soon after, the bank's structure was modified to
make operations simpler and ensure quick decisions. The original four-tiered structure was
modified into a three-tiered one, by doing away with the zonal office level...

The Revival
The official turnaround period of the Indian Bank 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 suffering losses for years. (During the period of turnaround total global
deposits had been increasing at a rate of around 10 percent per annum.) Operating profit
recorded the highest ever growth rate of 92.17 per cent to Rs.590.25 crore during the same
period. Net profit also zoomed to Rs.188.83 crore against Rs.33 crore in 2001-02. Although
deposits increased, cost of deposits had come down from nearly 9 percent to about 7.5
percent during the restructuring period.

The computerization efforts also paid off, and by early 2003 almost 600 branches had been
computerized, covering nearly 78 percent of the business. The bank had also considerably
increased its ATM coverage in most of the prominent centers in the country. It had 47 online
ATMs, which offered Any Branch Banking in 12 major cities across India.
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.

Commenting on the turnaround, Kumar said, "During the three years of the restructuring
plan, the bank could achieve consistent growth in business and also sustain its turnaround
due to initiation of various structural, operational and cost control measures. The bank has
also worked on marketing and motivational strategies and strengthened its planning and
monitoring systems."

She further added, "We have been able to meet all the major parameters that the RBI and
the Government had set before us. Throughout this period, the RBI and the Government
watched us closely.

The turnaround finally happened, when the Indian Bank posted its first net profit of Rs 33 crore
in six years in 2001-2002. In the fiscal year 2002-2003, net profits increased by 468 per cent to
Rs.188 crore

In the Business Standard Annual 'Banker of the Year Survey' 2003, the Indian Bank was ranked
second on the growth parameter. Analysts felt that this was no mean achievement for a bank,
which was in the throes of losses half a decade ago. The honor was not surprising, as 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
gained during the three-year period)...
Looking Ahead

Encouraged by the progress achieved during the three years of restructuring leading to the
turnaround, the 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 open in early 2005 (According to norms
laid down by the Securities Exchange Board of India , an entity can come out with an IPO only if
it posts profits for three consequent years and the Indian Bank was expecting to post its third
consequent profit in the fiscal year 2004)...

Kumar said the bank would be able to decide on the premium it should charge after profits
were declared in 2004. Vision 2010 was also aimed at making Indian Bank one of the top
banks in India by 2010. Considering the way it turned around a near hopeless situation,
Indian Bank's confidence seems justified.

The process of growth and development continues with an eye on quality , compliance and
regulatory aspects.

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This case study has been compiled from published sources, and is intended to be
used as a basis for class discussion. It is not intended to illustrate either effective
or ineffective handling of a management situation. Nor is it a primary information
source.
 EXHIBIT-I
The Seven Parameters of Efficiency Adopted by the
Working Group
Solvency
* Capital Adequacy Ratio (CAR)
* Coverage Ratio

Earning Capacity
* Return on Assets
* Net interest margin

Profitability
* Ratio of operating profit to average working funds
* Ratio of cost to income
* Ratio of staff cost to net interest income + all other income
Source: "The Verma Committee Report

EXHIBIT-II
INDIAN BANK'S NET INCOME OVER THE YEARS
PROFIT/
YEAR
(LOSS)
1995-1996 (1336.4 crores)
1996-1997 (389 crores)
1997-1998 (301.5 crores)
1998-1999 (778.5 crores)
1999-2000 (427 crores)
2000-2001 (274 crores)
2001-2002 33 crores
2002-2003 188 crores
2003-2004 (first
116 crores
half of fiscal)
 EXHIBIT-III
Performance
Performance
during the
during the
three year
corresponding
Domestic position (Rs. period of Improvement
preceding
in Crore) Restructuring (A-B)
Period (April
Plan (April
97 to March
2000 to March
00) (B)
03) (A)
1. Total Deposits 8362 4814 3548
2. Savings Bank 2641 1411 1230
3. Non food 2728 588 2140
4. NPA Reduction 1291 163 1128
5. Total Income 8269 5660 2609
6. Interest Income 6926 4988 1938
7. Non-Interest inc. 1343 671 672
8. Operating Profit 959 -349 1308
9. Net Interest Inc. 1840 688 1152

EXHIBIT IV

Present Performance as on March 2010

• Total Business crossed Rs.1,50,886 Crores as on 31.03.2010
• Operating Profit increased to Rs. 2747.35 Crores as on 31.03.2010
• Net Profit increased to Rs.1554.99 Crores as on 31.03.2010
• Core Banking Solution(CBS) in all 1756 branches
• Overseas branches in Singapore and Colombo including a Foreign Currency Banking
Unit at Colombo
• Diversified banking activities –
• 3 Subsidiary companies
• Specialised Overseas Branch at Chennai exclusively for handling forex transactions
arising out of Export, Import, Remittances and Non Resident Indian business

• 240 Overseas Correspondent banks in 70 countries

• 62 Special SME Branches extending finance exclusively to SSI units

Leadership in Rural Development

Pioneer in introducing Self Help Groups and Financial Inclusion Project in the country
Best Performer Award for Micro-Finance activities in Tamil Nadu and Union Territory of

Puducherry from NABARD.

Established 7 specialized exclusive Microfinance branches called "Microsate" across the
country to cater the needs of Urban poor through SHG (Self Help Group)/JLG (Joint Liability
Group) concepts
A special window for Micro finance viz., Micro Credit Kendras are functioning in 44
Rural/Semi Urban branches
Harnessing ICT (Information and Communication Technology) for Rural Development and
Inclusive Banking

Innovations in IT enabled Customer centric Initiatives:

100% Core Banking Solution(CBS) Branches

• 24 x 7 Service through 57000 ATMs under shared network
• Internet and Tele Banking services to all Core Banking customers
• e-payment facility for Corporate customers
• Cash Management Services
• Depository Services
• Reuter Screen, Telerate, Reuter Monitors, Dealing System provided at Overseas Branch,
Chennai
• I B Credit Card Launched
• I B Gold Coin

Strategic alliance with HDFC Standard Life Insurance Company for Life insurance business.

RTGS & NEFT remittance facilities now available at all CBS branches

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