indian bank case study2013.doc

7/27/2019 indian Bank Case Study2013.doc

1/8

Case Study

Financial Sector Reforms :

Impact on Indian Bank and its Turn Around & Growth Path

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 toserve 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
http://www.icmrindia.org/casestudies/catalogue/Business%20strategy2/The%20Turnaround%20of%20Indian%20Bank.htm#bot3%23bot3http://www.icmrindia.org/casestudies/catalogue/Business%20strategy2/The%20Turnaround%20of%20Indian%20Bank.htm#bot3%23bot3


2/8

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 NoteIndian 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 bankfound 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 GoIundertook 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 onthe 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 regular business.


3/8

Critical Factors 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 Available

The Verma committee pondered over the various options available to the Indian Bank. It decided thatclosure 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 healthierone. 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)1in 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
http://www.icmrindia.org/free%20resources/articles/INDIAN%20BANK1.htm#1]%231]http://www.icmrindia.org/free%20resources/articles/INDIAN%20BANK1.htm#1]%231]http://www.icmrindia.org/free%20resources/articles/INDIAN%20BANK1.htm#1]%231]


4/8

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."


5/8

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 theBusiness StandardAnnual '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 thethroes 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 postits third consequent profit in the fiscal year 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,regulatory

aspects and innovative approach which has been reflected in its financial results in

subsequent years.

During 2010-11 and 2011-12

The Bank recorded an Operating Profit of Rs 3,463 crores for the year ended March 2012 as

compared to Rs 3,292 crore in the previous year,The bank posted net profit of Rs 1714

crores and Rs1747 crores with improvements on all parameters.

Key Words:

Financial Sector Reforms,Turn around,Verma Committee,NPAs, Operational Efficiency, Key

Ratios,Financial Ratios,Business Mix

Issues involved:

What was the impact of Financial sector reforms on Indian Banks performance and why?

What action plan was worked out to face the challenges?

How Ms Ranjana Kumar was successful in her turn about strategy?

What is the present growth path of the Bank?

Would you like to work for this Institution ,if given a chance?

.


6/8

This case study has been prepared by Prof S P Garg, Jaipuria Institute ofManagement,Jaipur on the basis of information from published sources and isintended to be used as a basis for class discussion. It is not intended to illustrateeither effective or ineffective handling of a management situation. Nor is it aprimary information source.

18th July 2012

EXHIBIT-I

Source: "The Verma Committee Report

EXHIBIT-II

INDIAN BANK'S NET INCOME OVER THE YEARS

YEARPROFIT/

(LOSS)

1995-1996 (1336.4

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


7/8

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

half of fiscal)116 crores

Exhibit III

Domestic position (Rs.

in Crore)

Performance

during thethree year

period of

Restructuring

Plan (April

2000 to March

03) (A)

Performance

during the

corresponding

preceding

Period (April

97 to March

00) (B)

Improvement (A-

B)

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


8/8

Exhibit IV

Performance Highlights for the year ended March 2011Amount

y-o-y growth(` Crore)

(%)

Core Operating Profit 3015.45 40.5Operating Profit 3291.68 19.8Net Profit 1714.07 10.2Business 181530 20.3Deposits 105804 19.9Advances 75726 20.9

---------------------------------

indian bank case study2013.doc

Documents