ranjana kumar interview

34

Ranjana Kumar, as Chairman and Managing Di-rector (CMD) of Indian Bank, a 95 year oldbank owned by the Government of India, man-

aged one of the most significant turnarounds in per-formance in the history of banking in India. With anegative capital adequacy of nearly 13%, IndianBank was considered one of the weakest banks in theyear 2000, when Ranjana Kumar took over. Underher stewardship, the bank has turned around suc-cessfully, achieving all the targets set under the re-structuring plan, including bringing the gross non-performing assets (NPA) down from 43% to 15% inless than two years. What are the lessons for the in-dustry from such a turnaround in the face of tremen-dous competition? What were the challenges facedby the bank, and what were the strategies that madethis feat possible? Professor Ashok Thampy discussedwith Ranjana Kumar the issues involved in order tounderstand the way forward for other public sector

Interview

units, and for the banking industry in general.

The Indian approach to restructuring has tradition-ally been recapitalisation by the government. In thiscase, however, the government decided to try a newapproach, imposing conditions for the disbursementof funds for the first time in banking history. An MOUwas signed in which, among other things, the unionsand associations agreed to give the management afree hand, and funds were to be disbursed only after aprofit was shown. This ensured accountability andput pressure on the bank to perform, and, along withstrategic decisions like merger of branches anddelayering, and some innovative HR practices, con-tributed to the success of the restructuring plan. Theimportant lessons that emerge from the interview arethe need to involve and empower public sector em-ployees, and the importance of putting in place sys-tems and processes that enable informed and quickdecision making.

Resurrecting a Bank: KeyLessons From theTurnaround of Indian Bank

Ashok Thampy

Resurrecting a Bank: Key Lessons From the Turnaround of Indian Bank

IIMB Management Review, March 2004 35

AT: The turnaround of Indian Bank has created a lotof interest, particularly since it is a public sector bank,where the issues are very different from those of abank in the private sector. What were the major chal-lenges that you faced when you took over as the CMDof the bank?

RK: Indian Bank was at that time considered one ofthe weakest banks. It had made losses consecutivelyfor a period of eight years and had a very high NPA –much higher than the industry aver-age. The post of Chairman had alsobeen lying vacant for quite some time.As a result of all this, the morale of thework force was very low. But on thepositive side, this was a 93-year oldbank with a good and loyal clientele,which had been operating successfullyright up to the late 80s.

At the time I joined the bank, the Man-agement Advisory Group, at the be-hest of the RBI and the government,had done an extensive study of thebank and submitted a report, which waspublished in November 1999. TheGroup consisted of four eminentpeople: Deepak Parekh, Chairman,HDFC; S D Kulkarni, the former MDand CEO of Larsen & Toubro; Ram KGupta, MD, State Bank of Patiala; andDilip Choksi, a well known charteredaccountant in Mumbai. That was also the time whenthere was severe adverse publicity from the CII reporton the bank. I was offered the job of Chairman andManaging Director in May 2000, and after attending acouple of meetings with the government and the RBI,I joined in June.

According to the report, the bank had receivedrecapitalisation of a sum of Rs 2400 crores (24 bn) al-ready – around Rs 600 crores (6 bn) in the late 80s andearly 90s, Rs 1700 crores (17 bn) in 1998, and 100 crores(1 bn) in 1999. Despite this, the continuous losses hadtotally eroded into the net worth. When I took over,the bank had a negative capital adequacy of nearly13%. So we had a negative net worth in addition to thelosses.

The most important factor that we had to take cogni-sance of was that from 1996 to 1999, the bank hadtotally frozen credit because, in the years prior to this,there had been substantial indiscriminate lending. Nowthe bank swung round to the other extreme and totallystopped lending. If anything had to be done it had tocome all the way to the headquarters at Chennai. This

led to the bank losing market share and good custom-ers who were risk shy, but would have stayed with usif we had met their needs.

In addition, the bank had asked the CBI to investigatea lot of cases and there was a fear psychosis withinthe organisation. Consequently within the bank, thedecision making ability and the risk taking ability werecompletely crippled. HRD was tremendously neglected.For over six years there had been no fresh recruitment

and even internal promotions hadbeen delayed except for some of thetop ranks. (In fact I finally did somepromotions this year, after a gap ofeight years.) One of my immediate con-cerns was the culture of theorganisation. I believe in anorganisational culture whereassertiveness is strongly encouraged.Hierarchy and seniority can be re-spected but people must have indi-vidual opinions, and stand by them.

So this was the situation in which Icame to the bank: losses, weak gover-nance, non compliance with statutoryrequirements, negative net worth,negative capital adequacy and lowmorale. I could not be blind to the situ-ation, but I was also looking at the factthat this was an institution with over1500 branches, including two foreign

branches at Singapore and Colombo, and 26,000 em-ployees, including 9000 officers. So I joined with asense of optimism, and as a result, the mood in thebank was upbeat.

AT: What were your immediate priorities when youtook over as CMD?

RK: My first task was to come out with a clear cut,detailed and comprehensive restructuring plan, cov-ering a period of three years. In particular it was tofocus on the average aggregate growth of deposits,advances and investments; the reduction of non per-forming assets (NPAs) in terms of gross NPAs and netNPAs; and increasing the gross profit and net profit.These seven major items on the agenda were to helpthe bank create a budget showing a month to monthimprovement in these various areas – basically growthin deposits and advances, which would lead to otherinternal factors like income (interest and non-interestor treasury) and expenditure. It was a very detailedexercise and also went into the internal administrativechanges, policies and procedures, because when sucha restructuring is done, it is important to focus on all

This was the situationwhen I came to thebank: losses, weakgovernance, noncompliance with

statutoryrequirements,

negative net worth,negative capital

adequacy and lowmorale. But this was

also an institutionwith over 1500

branches and 26,000employees.

36

areas and bring about all the necessary changes si-multaneously. We decided to adopt a two-prongedapproach: simultaneously increasing the income andreducing the expenditure.

I called for a meeting of my top management – thegeneral managers, whom I found to be responsive andcompetent people. Without wasting time on postmortems, we did a detailed diagnosis. Once we hadidentified the problems, one of the first things we un-dertook was the merger of branches. We didn’t needsuch a big network, and many of the branches wereunviable. In the first two years of the restructuringplan we merged as many as 119 branches all over thecountry, which is a tremendous exercise especially inthe public sector. It was a very scien-tifically done exercise, based on a clearperformance analysis, and adequatenotice was given to the public. Our aimwas to portray to the public at largethat the entity that comes out of amerger is a stronger entity in terms oflocational, technological, product andclient advantage. So the merger wasnever viewed as a ‘negative happen-ing’. There was not a single complaintreceived about inconvenience to acustomer, and we did not lose anybusiness because of any merger.

Of course we needed the cooperationof the unions and associations. In sucha situation, a lot depends on howclearly you communicate the reasonsthat necessitate the exercise, and thesteps to be taken. Everyone has tounderstand that every step taken isbased solely on the interests of theorganisation. Once they saw the logic, the mergerswent off very smoothly.

The second important change I brought about, almostimmediately after I took charge, was delayering. Likemost banks, we had a four-tier structure: head office,zonal office, regional office and branch. We decidedto cut this down to a three-tier structure by doing awaywith the twelve zonal offices. The regional offices wererenamed circle offices. We created 30 circles. Some ofthese already existed as regional offices. In some casesthey had to be created; in some, two regions weremerged; and in the case of Chennai, we bifurcated theexisting regional office into two because we have alarge network in Tamil Nadu. (Tamil Nadu is one of ourmain states – almost 45% of our branch network ishere.) Basically the idea was to make the branches andcircle offices stronger, decision making quicker, cut

down costs and use our manpower in a more construc-tive way. We were the first bank to do this exercise andnow many banks have followed suit. We also went fora VRS, in which we reduced 3200 people including 2000officers.

There was some apprehension in the beginning aboutwhether these administrative changes would reallywork, because the regional managers were used to adifferent kind of authority and felt totally vulnerablepost delayering. So we decided to simultaneously bringin systems and procedures. One necessary change webrought in was the segmentation of branches. At thattime, all branches were doing all kinds of work. In theRBI’s annual financial inspection reports on the bank,

one of the recurring adverse commentswas on the poor quality of credit ap-praisal, especially commercial credit ofover Rs 1 crore (10 mn). Earlier suchcredit was being done by almost 400branches of the bank. We decided toreduce it to just 66 credit intensivebranches in the larger cities andmetros. Ten of these were designatedcorporate branches to handle credit ofRs 25 crores (250 mn) and above. Allthe credit intensive branches aremanned by officers who understandcredit and have practical/operationalexperience.

AT: Do these credit officers receiveany specialised training?

RK: Yes, we give special training interms of theoretical and practicalknowledge, and in terms of work ex-perience in handling credit. Training

programmes in Credit Management are conducted atSBI Apex College. Credit requires specialised knowl-edge of the industry to which you are lending and theneeds of the customer, to enable an accurate assess-ment of the risk involved. We also set up a Credit Moni-toring and Review Department (CMRD), to indepen-dently monitor the department that looks into loansanctioning or approvals. The CMRD monitors notonly the accounts which have not been doing well(sub-standard assets, doubtful assets and losses), butalso standard assets, which are credit accounts oper-ating within the sanction terms, complying with all therequirements and delivering the goods. We felt thatwith the volatility of the market and the pace of changestaking place, standard assets could also be a vulner-able category and needed to be monitored. Today wehave a separate department for risk management,headed by a general manager.

Credit officers receivetraining and

experience inhandling credit. Creditrequires specialised

knowledge of theindustry to which you

are lending and theneeds of the

customer, to enablean accurate

assessment of therisk involved.



AT: What were the initiatives for increasing the in-terest income of the bank?

RK: Another immediate change I brought about wasto resume financing. So we came out with some simple,attractive structured products – consumer loans, per-sonal loans and vehicle loans. The bank advertised inthe newspapers after a period of seven years, promis-ing loans within 48 hours. Since these were simpleconsumer loans, they were very easy to approve andto service. We started with a few select cities, andthen gradually extended it across the country. Wewanted to show that this was a bank that was comingalive. These structured products didus a lot of good. According to the fig-ures for September 2003, we have8,18,000 accounts in just these threeproducts, which focussed on the retailside of the business (we hadspecialised branches for the other busi-nesses). In terms of the amount, Rs4100 crores (41 bn) have been dis-bursed as loans, including housingloans. We decided to adopt a very ag-gressive strategy on housing loans,and in fact, the Economic Times inDecember 2001 put us almost on parwith the State Bank of India in terms ofaggressive marketing of housing loans.These new products helped us to getmomentum on the asset side, broughtactivity into the bank and helped fo-cus us as a vibrant bank.

AT: The private sector banks are veryaggressive on the marketing side. Did the initiativesto increase the loan portfolio involve actively goingout and getting customers?

RK: At one time we only had walk-in customers. Theaverage age of our staff was around 46 years. Therehad been no fresh recruitment for a long time, and inthe situation I have detailed, how can you expectstrong marketing?

Once we were well into the restructuring, however, wedid a mass campaign on Sundays and holidays. Morethan 5000 staff members across the country took partin this exercise, going from door to door to informpeople that we were back in business and working evenon a holiday, and to get feedback from customers. Thiswas part of our strategy to excel in service to custom-ers, and helped the bank with business acquisition,getting publicity, improving its image, and involvingthe staff.

From mid-2001 we have also been taking on MBA stu-dents on summer training for three months or so, andthis has helped us a lot in the marketing area. Thesestudents are young, smart, energetic and eager tolearn. Once they understood the practical problemsand the situation of the bank, we attached each ofthem to a branch, with the Circle Heads reviewing theirperformances. They became our spokesmen in themarket and brought a lot of new business. We havegained many valuable insights from these interns, in-cluding the fact that we weren’t doing enough to at-tract younger customers. So in end 2002, we came outwith a special scheme for youth, called the ‘power ac-

count for young achievers’, and wegave them a lot of sops to open anaccount. This was inaugurated with alot of fanfare and made news.

I think this is the first t ime anationalised bank has used such novelmethods (hiring of MBA students).And it fulfilled a mutual need. TheirCVs also gained value with this expe-rience in a bank in the restructuringmode. This year we have also startedtaking students of agriculture collegesas summer trainees to further improveagriculture credit. It’s a novel method,and it’s working well.

AT: Is the agriculture sector a sig-nificant part of your loan portfolio?

RK: Yes, for the last three years, wehave been one of the few banksachieving all the statutory require-

ments for lending to the agriculture sector. A lot ofwork has been done in the rural areas, and we are plan-ning to have separate rural branches. We also receivedan award for the best performance in agriculture amongnationalised banks.

AT: What internal processes were adopted to helpmanage the successful turnaround of the bank?

RK: We reviewed all our internal systems, and we madeour own policies on industry – specific loan policy,lending policy, etc. Being such an old bank, we had alot of exposure to core sectors like steel, cement, tex-tile, sugar and auto industries. These were the indus-tries that went into a little rough weather, and are nowlooking up.

An important change was to introduce monthly meet-ings of the top management committee, headed by theChairman and Executive Director (ED). In these meet-ings we discuss all the developments since the last

For the last threeyears, we have beenone of the few banks

achieving all thestatutory

requirements forlending to the

agriculture sector.Much work has been

done in the ruralareas, and we areplanning to have

separate ruralbranches.

38

meeting – new business, RBI visits, trainingprogrammes, observations of the ED and GMs on vari-ous sectors or branches they have visited, board meet-ings and observations of the board. These meetingslook at the progress and identify areas of concern.This forum is used to discuss business and not day-to-day housekeeping matters. The minutes of the meet-ings are sent to all the circles, and they in turn send itto all the branches, to be discussed at their monthlymeetings. This is a very good method of communicat-ing down the line, and helps to align strategy from thetop to the bottom. People are aware of areas that aredoing well and share concerns about the areas wherethere has been inadequate progress.

We also started the Head Office AuditCommittee, headed by the Chairmanand including the ED and all GMs andDGMs, where all audit observationsand irregularities are brought to no-tice. This is a very important exerciseand we need inputs from all the execu-tives so that we understand why a par-ticular branch was being repeatedlyrated unsatisfactory, why some inter-nal housekeeping books have notbeen balanced, whether there is a dis-cipline problem, and so on. This is agood way of having hands on controlon what is happening, how replies ofaudit are being given, whether the ob-servations are being repeated andwhether any rectification or improve-ment has taken place.

All this has taken time. We have donea lot of learning, and have also invested a lot intotraining. Training has become a crucial area. We havethe Apex Training College in Chennai, and some othertraining centres. We also send out teams of two orthree good senior officials to conduct two-dayprogrammes in various places, specially major metros.These programmes are discussion-based and focus onpractical issues such as likely mistakes, pre-emptivesteps, initial indicators, and how to address the prob-lems once they had occurred.

The important thing is that the bank now has a profit-ability awareness, which was not there earlier. Indis-criminate lending accompanied by high cost depositsand market borrowing (sometimes as high as 70%)caused eight years of losses. When we started therestructuring plan the cost of deposits was over 8.7%,today it is 5.9%. Today there is an awareness that bank-ing is business, not charity. As Chairman of the bank,I made it my business to make this happen. In the first

one and a half years, the Executive Director and I trav-elled all over the country, and talked to as many of thestaff as possible. I attended and addressed the inau-guration of every training course. I addressed mybranch managers, and did performance reviews withthem – something usually done only by the CircleHeads. That is where we came out with something veryimportant – the 5-point formula. That is, every branchmanager (after the merger we had about 1385 branches)is aware at any given time of the following: 1. the costof the deposits; 2. yield on their advances; 3. totalincome; 4. total expenditure; and 5. likely slippage fromstandard to sub standard. This awareness is what has

brought down the cost of deposits.There has been a lot of reduction inour interest expenditure. I made a pointof talking very frankly to all the em-ployees, telling them exactly what washappening in the bank. I also madeaudio cassettes, which were circulated.All this helped me to get the supportof the unions and associations. So alot of energy has gone into communi-cating.

AT: Given the competitive environmentin the banking industry, what were thechallenges that you faced in success-fully restructuring Indian Bank?

RK: The external environment is bothcompetitive and constantly changing.And you must remember that we didn’thave a level playing field. There hadbeen so much negative publicity allover the country, especially in Chennai,

where we have our headquarters. Even though thiswas a bank coming back to normalcy, why would some-body want to come to a bank like this? Even a PSUcould not bank with us because we did not complywith the requirements of the Bureau of Public Enter-prises. These requirements were: 1. that the bankshould have been making profits for three years; 2.that the bank should have a required capital adequacy;and 3. that the bank should have a positive net worth.I went to visit all the big business houses in Chennai,Mumbai, Delhi etc. Against all odds, we made a break-through with some of the corporates. But even then itwasn’t smooth sailing because of the tremendouschanges that have taken place in the industry in thelast three years. Much of our existing portfolio is on afloating rate. When we started the restructuring planthe prime lending rate (PLR) was 13.5% and today it is11.5%. Lending to the export sector has come downfrom 10% to 8%. Lending to the SSI has also come downby 2-3%, and in terms of agriculture the government

The bank now has aprofitability

awareness. Everybranch manager isaware at any given

time of the following:the cost of deposits;yield on advances;total income; totalexpenditure; and

likely slippage fromstandard to sub

standard.



norms are very clear: up to Rs 50,000 it’s a fixed rate of9%. The public sector is asking for loans at 6.5-7%.Housing loans have come down from 11-11.5% to 8.5%.

In 2001, we had one more crisis on our hands – theSingapore Monetary Authority was talking of closingour branch there. The Singapore branch does mainlytrade finance, and we have a large line of credit.Singapore is a very important neighbour today in termsof business, and the closing of the branch would haveaffected not only the bank but also thecountry’s image because this is a long-term relationship. We have been oper-ating there for 65 years, and we had afull-fledged licence, which is not avail-able today to other banks in Singapore.Nor is the licence transferable or sale-able. Fortunately, we averted the cri-sis by transferring some funds fromhere to reach a comfort level.

Though we are coming out of a diffi-cult situation and are showing a con-sistent improvement, it is not easy –the revenue on our existing portfoliois coming down, and this is putting usunder pressure. True, the deposit rateshave been coming down too, but notas much as this. So I asked myself, dowe really need a big balance sheet?The most important thing as I see ittoday is your income and its effect onnet profit. So net income depends uponthe quality of your advances, because it is no use in-creasing your lending if the quality of advances is notmaintained. That’s why we have given so much impor-tance to the continuous monitoring of credit, risk man-agement and management of the standard assets.

In terms of provisioning norms we have to decide onour policy. And with the delinquency period being re-duced from 180 to 90 days from April 2004, we have totake decisions quickly and efficiently. In the future,for a banker to remain alive in the industry, I thinkspeed in decision making is going to be all important.That means you have to have the data that you needto take a decision – the balance sheet, the operationsin the accounts, the various ratios, the industrial cli-mate of a particular industry – at your fingertips. Thenyou can decide instantly whether and when you needto reduce your exposure to this industry. And you needto take that decision when the account is still a stan-dard asset, and not when it is becoming an NPA. Thatmeans you should have the ability ‘to look aroundcorners’. I’m talking of the industry at this point, notonly Indian Bank. That’s what we are working on now,

building up the necessary processes. It can’t be doneovernight.

AT: Coming back to the issue of restructuring, theIndian approach has been recapitalisation – and theMOU is a recent improvisation. Other countries havetried out various things like classifying them as goodand bad banks, or selling off the NPAs to restructure.What in your opinion is the best way to deal with theproblem of weak banks?

RK: We have been talking of the As-set Reconstruction Corporation(ARC) but it hasn’t really taken off inthis country. But I think thegovernment’s approach torecapitalisation with conditions, is agood thing. After all it is the hardearned money of the tax payers, andthere has to be accountability.

Now as part of the restructuring plan,I was to get Rs 2100 crores (21 bn)from the government in the course ofthe year 2000 – this had been decidedand approved in the restructuringplan. But the government decided –and, I think, rightly so – that theywanted proper accountability becausethey had already doled out so muchmoney earlier, and nothing had comeout of it. So they watched our perfor-mance and we reported to them every

quarter; and it was only 22 months after the restruc-turing began, in March 2002, that the governmenthanded over the first instalment of Rs 1300 crores (13bn). That’s when our net worth became positive. Asper the restructuring plan, our first net profit was tocome in the year 2003 but we made a profit of Rs 33crores in 2002 – net profit after eight years, but thatwas because of interest cost. I must emphasise againthat I think that was a very good strategy on the partof the government to t ie up the amount(recapitalisation) with our performance. It was like asword of Damocles hanging over our heads, and wehad no option but to perform.

AT: A major contributor to the huge losses sufferedby Indian Bank was high NPAs. You have been able tobring down the gross NPAs from Rs 2,578 crores(25.78 bn) in 2001-02 to Rs 1,630 crores (16.30 bn)in 2002-03. What was your strategy for bringing downgross NPAs? How useful were programmes such asone-time settlement schemes and corporate debtrestructuring in effecting recovery and bringing downNPAs?

In the future, speed indecision making is

going to be allimportant. You haveto have the data thatyou need to take a

decision – the balancesheet, the operationsin the accounts, thevarious ratios, the

industrial climate of aparticular industry –at your fingertips.

40

RK: I started the restructuring plan with 17% net NPAand today we are at 6.15% net. So there has been sub-stantial recovery. We have a very pragmatic compro-mise policy, but we have also been very aggressive onthe recovery front, including conducting almost 3000camps all over the country. On the RBI one time settle-ment scheme, Indian Bank topped in debt recovery.We have also done a lot of work on need based re-structuring of accounts, rehabilitating overdue bor-rowers, and helping in the restructuring of sick unitsand so on. Of course this is subject to the viability ofthe unit, the future prospects and of course the trackrecord of the promoters. So we may give additionalcredit, a reduction in rate of interest, or staggering ofpayments, depending on the basic need of the unit atthat time.

If you compare the performanceof the bank three years prior tothe restructuring plan (from 1997to 2000) with the growth duringthe restructuring plan you willfind that the cumulative growthpercentage shows a marked im-provement in all areas (Exhibits1 and 2). There have been im-provements in deposits, sav-ings bank, lending, interest in-come, non interest income andeven reduction in NPAs.

Exhibit 3 shows our perfor-mance compared with othernationalised banks on cost in-come ratio, the spread, capitaladequacy, ratio of staff cost tonet interest income (NII), and

coverage ratio. As of March2003, our business mix was Rs40,000 crores (400 bn). Out ofthis, Rs 10800 crores (108 bn)have come in these three years.That means one quarter of thisbusiness as it exists today camein these last three years. Thesavings bank growth, as I men-tioned, is linked with the struc-tured products, and is one wayof understanding the basic ac-ceptance of a bank by the cus-tomer. The continuous increasein this segment has been a verypositive factor.

AT: In this restructuring yourhead count went down but at the

same time per employee revenues went up. How didyou bring about this efficiency? Did IT play a role inthis?

RK: Yes, definitely. At this point 78% of our businessis computerised.

AT: The income statements of Indian Bank reveal thatthere has been a sharp increase in interest income aswell as fee income in the last two years. What wasyour strategy to achieve this? What was the contribu-tion of the treasury to this growth?

RK: The specific strategy was to open eveningcounters in certain specific branches just for savingsbank, current accounts and demand drafts. Demanddrafts are remittances, and that is specifically fee

Exhibit 2: A Comparison of Indian Bank’s Performance —Business Results

Domestic A: Growth Before B: Growth During ImprovementRs Crore RP (April 1997- RP (April 2000- (B-A)

March 2000) March 2003)

Amount %

Deposits 4814 8362 3548 73.70

Savings Bank 1411 2641 1230 87.17

Credit 588 2728 2140 363.95(non-food)

Investments 3382 6174 2792 82.55

Reduction 163 1291 1128 692.02in NPA

* RP : Restructuring Plan

Exhibit 1: A Comparison of Indian Bank’s PerformanceWorking Results

Global Position A: Growth Before B: Growth During Improvement in Rs Crore RP (April 1997- RP (April 2000- (B-A)

March 2000) March 2003)

Amount %

Total Income 5660 8269 2609 46.10

Interest 4988 6926 1938 38.85

Non Interest 671 1343 672 100.15

Expenditure 6008 7310 1302 21.67

Operating Profit _349 959 1308

* RP : Restructuring Plan



income. Secondly we are bringing in the cash manage-ment system (early clearance of cheques, which is be-ing done by some of the foreign banks) with the helpof technology. We started this about eight months agoand are in the process of refining it. We also plan toexpand our current accounts. Other than that we arelooking at letters of credit and guarantees.

Treasury income did contributeto this, but no more than in thecase of any other bank. Whatwe did basically was to take ad-vantage of the falling interestrate regime while very aggres-sively taking a proper view ofthe market movement. So netappreciation was about Rs 1200crores (12 bn) in these threeyears and there was some de-preciation because of the sub-sidiaries. We had three subsid-iaries – mutual funds, housingand merchant banking, whichbecame a drag on the bank. Ear-lier, when the accounts becameNPAs in the bank they startedlending through the subsidiar-ies. We managed to sell the mu-tual fund in a very good deal,but housing and merchant bank-ing, we will be taking up our-

selves. We are just watching it for some time and try-ing to recover what we can.

AT: What were the major human resource challengesat IB? What measures did you adopt to ensure thecooperation of the unions, which would have been vitalfor any restructuring to succeed?

Exhibit 3: Key Viability Ratios

Ratio 1999- 2000- 2001- 2002- Avg for Nation-2000 2001 2002 2003 alised Banks

March 2003

CRAR (Capital+Reserves)/ -11.64 -13.60 1.70 10.85 12.24RiskWeighted Assets x 100

Return on Assets -2.14 -1.25 0.13 0.65 0.98(Net Profit/Average Assets) x 100

Operating Profit to Total Working Funds 0.11 0.25 1.14 1.93 2.49

Net Interest Margin (Net Interest Income/ 1.87 2.24 2.20 2.95 3.16Average Interest Earning Asset x 100)

Cost Income Ratio (Non Interest Expenses/ 96.36 92.35 70.27 56.13 49.97Net Interest Income+Non Interest Income) x 100

Ratio of Staff Cost to NII + All Other Income 75.32 73.68 54.51 42.82 35.35

Coverage Ratio (Equity Capital+Loan Loss -11.90 -8.91 -2.14 1.69 3.20Provision minus Non Performing Loans)/Total Assets x 100

Continued Progress of Indian Bank

This interview took place in October 2003. Indian Bank's latest results, for thenine month period ending December 2003, showed:

� Operating profit grew by 22.76% to Rs 484.06 crores (4.84 bn). Thecorresponding figure for December 2002 was Rs 394.31 crore (3.94 bn).

� Net profit grew by 116.18% to Rs 301.76 crore (3.02 bn) as against Rs139.59 crore (1.40 bn) for the corresponding period of last year.

� Cost of deposits was lower at 5.68%, as compared to 6.71% for thecorresponding period last year.

� Net Interest Income rose by 39.09%, from Rs 222.23 crore (2.22 bn) toRs 790.78 crore (7.91 bn), as compared to Rs 568.55 crore (5.69 bn) forthe corresponding period of last year.

� Capital Adequacy Ratio (CRAR) of the Bank improved to 12.85%, ascompared to 10.85% for March 2003 due to improved profit.

� Return on Assets improved to 0.84%, as compared to 0.65% for the yearended March 2003.

� The business per employee improved to Rs 191 lakhs (19.1 mn), ascompared to Rs 159 lakhs (15.9 mn) in March 2001- 02 and Rs 179lakhs (17.9 mn) in March 2002-03.

42

RK: As I mentioned earlier, when the government saidthat they were going to recapitalise the bank, they werevery insistent on accountability. We had to sign anMOU, and at that time we were ready to agree to any-thing because we were frantic to get this amount andwe were confident. The unions and associations hadto sign the MOU too, because it included clauses likenot availing of leave fare concession for some time,travelling in a lower class and so on. The unions alsohad to agree to give the management a free hand – forthe first time in the banking industry. You can imaginetheir reaction, but the government was firm. The tusslewent on for almost ten days. Finallyafter I assured them that I wouldn’tturn into a Ghengiz Khan overnight,they agreed to sign.

AT: This must have been rather un-usual for our country!

RK: I have not talked much about it,because in such a situation, a personin a position of responsibility has tobe discreet. Anyway, they signed thisMOU, but I tried to be fair to ourpeople. One thing that came up in mypreliminary discussions with them wasthat though the revision of salaries hadtaken place somewhere in the late 90s,they had still not received their revisedwages. I felt they must receive the re-vised wages, but the payment of thearrears could be linked with perfor-mance. So part of the arrears (about20%) was paid to them in 2001, 40%after we made the first net profit in 2002 (after we de-clared the results and after they signed the MOU), andthe final 40% was paid last year at Diwali. So there wasa strong performance incentive, and the unions andassociations were also happy that we kept our prom-ises to them.

AT: What are the systems, practices and performanceincentives that you have introduced in Indian Bank tobring about greater accountability?

RK: Being a public sector bank we are somewhat con-strained in terms of incentives. But we have introduceda system of recognising good performance. For ex-ample, we call the branch managers of the two bestbranches from each circle to make a presentation be-fore the Board, and they are awarded certificates. Thatis a tremendous incentive.

I believe that involving people is the most importantthing, including letting them have a say in the kind of

work they would like to do. Of course, not all postingscan be through choice, but we have started makingjob cards for officers now. When a vacancy arises thatrequires some specialised knowledge, we identify theofficers who have the qualifications and the experi-ence, and then we ask those who are interested toapply. We also make it clear that every department isdoing important work. The traditional way of lookingat the audit department, for instance, is as a parkingplace for those who are not good in the field. But auditis not only a fault finding department, but a very im-portant and constructive exercise, because it is a cor-

rection of things to come, and so itneeds to be done by talented people.

It is also very important to give creditwhere it is due. An innovative ap-proach we took was to base the pro-motions of clerical staff to officers onmerit rather than on seniority – andwe have got about 200 very brightyoung officers, who have undergonetraining and are doing exceedinglywell.

Empowerment and accountability needto go hand in hand with sharing ofcredit. Earlier, branch managers werenot empowered to take decisions likesanctioning loans and sanctioningleave to the staff. When we changedthat, they were at first hesitant, butnow they are happy to take responsi-bility and have grown in confidence.

AT: In public sector banks, the term of the CMD isusually just two years or three years, and thereforethe continuity in the management is often lost. For atransformation or a new strategy to be implementedand sustained and for the results to come in, it takesat least two to three years at the minimum. What areyour views on this?

RK: I totally agree with you on that. It should be threeyears at a minimum. Not only that, I think we shouldhave processes for succession planning, so that thenext man is initiated into the running of the bank. That’swhat we are planning in our bank. Continuity is impor-tant but it’s also important to adapt and change whennecessary. New ideas keep an organisation healthy.However, the basic thing is to keep in mind the interestof the organisation, and bring about changes whichcan gel with the existing arrangement. For Indian bank,I could not have suddenly turned ultramodern becausethis was a bank which had a certain traditional image,and I had to respect that. Changes have to be made

We should haveprocesses for

succession planning.It is important toadapt and change

when necessary butcontinuity is also

important. This was abank which had acertain traditional

image, and I had torespect that.



but not changes that uproot the entire edifice, unlessof course something is drastically wrong and it has tobe remedied.

AT: There is a lot of talk today about corporate gover-nance and the role of the board. What role did theboard play in this restructuring?

RK: The board has played a formidable role, I wouldsay. To start with, we had a truncated board, but nowwe have some very eminent members – one was theChairman of the State Bank of India, and one was MDof the State Bank and earlier of ICICI Bank. Then wehave a former Director, as well as the present one, ofIIT Madras, a prominent advocate, and a charteredaccountant, and even one member from the CBI. Thisis a very responsible and constructive Board, which isessential for any bank, and even more so in a bankwhich is going through restructuring.

One of the important things a Board has to ensure isthe health of the organisation, and for this we needtotal transparency. In Indian Bank, for instance, thebank actually declared a profit of Rs 300 crores (3 bn)one year, when there was no profit. Subsequently a lotof provisions were made against such practices. Inany good book keeping system, you cannot hide any-thing, ultimately it will all come out, specially now withthe regulatory norms being what they are. Unless youhave transparency, you cannot equip yourself to facereality. As I said, monitoring of standard assets is veryimportant, along with timely action.

One of the problems in the public sector banks wasthat the decision making process was tardy – you fileda case and it went on for years. Their legal portfoliosare huge. Although things have improved in recentyears, I feel in many cases the best option may be anout of court settlement. And this has to be done whenthe asset has still got some value. For example take amanufacturing concern. If you do not settle early, themachines that have been charged to the bank may be-come obsolete and it will be impossible to find buyers.So it’s important to take decisions in time and salvagewhat you can.

AT: In my discussions with other bankers, one of theissues that has been coming up on a regular basis ishesitancy to take decisions because you are answer-able to so many other agencies like the Auditor General,

the CVC and the CBI. What are your observations?

RK: That is true to some extent but the cost of nottaking a decision is huge. Today the government haveon the one hand brought the Securitisation Act, andon the other, they are talking about lender liability. Ifyou are not properly prepared, your NPAs will shootup and then what do you do? The solution is to makedecisions based on a proper study of all the circum-stances and the alternatives you have, and write downall the details and the logic for taking the decision. Soyou have to have a system that enables such quickand informed decision making. Of course, for everyten decisions you take, two may go wrong but whathappens if you had not taken the eight that were right?Of course, you need a lot of mental toughness to de-fend your decision. I think every bank should havesome training programmes that help employees developmental strength. Today unfortunately we don’t have asystem for making people accountable for not takingdecisions. It is not easy running a public sector enter-prise, but that is part of the job. No system is going totolerate non performers.

AT: In your experience with Indian Bank, what arethe important lessons you have learnt?

RK: One important lesson, as I said in the beginning,is that it is necessary to encourage assertiveness inyour people, and the ability to take decisions. In In-dian Bank unfortunately a lot of the decisions weremade at the top and people just went along with them.Often they did not know what they were doing be-cause they had no specialised knowledge. Nationalisedbanks do have a lot of respect for hierarchy, and theChairman of the bank is a very formidable person. Insuch a scenario, it is very important to be transparent,fair and send out clear messages.

Training is very important. We have such a lot of tal-ent in our nationalised banks, but can any of themclaim that they have been able to harness even 70% ofthe potential of their work force? I don’t think so. Infact a lot of performers today in private banks are thosewho have gone from the nationalised banks. So weneed to make our environment conducive to growth.That’s what we are doing in Indian Bank. All this helpsdevelop a greater degree of resilience, which is veryimportant today.

Reprint No 04103

ranjana kumar interview

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