The

Reawakening

of

Indian

Bank-

Turnaround Strategies of Indian Bank

Authors-

AMAL

REMESH

&

ADITH

VENUGOPAL**

Abstract

Indian bank established in 15th August 1907, which was considered as one of the
fastest growing bank. In the mid eightys it started facing a problem in the management of assets
and liabilities due to indiscriminate growth of credit. The Government Of India and RBI decided
on a restructuring plan in June 2000 under the leadership of Smt. Rajana Kumar who is the First
woman Officer in the Public sector banks to become Chairman and Managing Director. The
research is conducted by reviewing the book written by Smt.Rajana Kumar A New BeginningThe Turnaround Story of Indian Bank. This Research Paper seeks to ascertain the various
structural, operational, cost control, marketing and initiatives to motivate its workforce that were
done during the turnaround phase. Thus made it to achieve a sustainable turnaround with
complete reengineering of its business mechanisms.

Keywords:

turn

around

**MBA, Sree Narayana Gurukulam College of Engineering, Kadayiruppu

strategies

INTRODUCTION
Indian Bank was founded as a swadeshi bank on 15 August 1907, exactly 40 years before India
got its independence, with an authorized capital of Rs 20 lakh. It is 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. During the first year of operations, the Bank received deposits
of Rs 2, 01,157 and made a profit of Rs. 5,505. As a bank backed by the government, Indian
Bank continued to flourish and boasted of the trust it had been enjoying since the early 1900.
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 computerized. 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. Through its
trusted banking service it gained its brand equity, committed and emotionally attached customers
who have been banking for generations with it.
The 'nine decades of trust', suddenly came under threat in the 1990s, when the Government Of
India and the Reserve Bank of India Reintroduced a new set of norms for the banking sector.
The Banks CREDIT-DEPOSIT RATIO grew disproportionately to 64.6 percent as of March
1992 (as against 52.4 percent for all banks), causing illiquidity in the Bank which was due to
progressive spurt in credit growth without matching growth in customer deposits. To meet
statutory requirements it had to rely on high cost market instruments and borrowings from the
call money market at exorbitant rates. This severely strained the Banks profit 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

NATIONALISATION OF BANK
In 1983 ethnic sectarian violence in the form of anti-Tamil riots resulted in the burning of Indian
Overseas Bank's branch in Colombo. Indian Bank, which may have had stronger ties to the
Sinhalese population, escaped unscathed. IN 1990, Indian Bank rescued Bank of Tanjore (Bank
of Thanjavur; est. 1901), with its 157 branches, based in Tamil Nadu. A multi-crore scam was
exposed in 1992, when then chairperson M. Gopalakrishnan lent 13 billion to small corporates
and exporters from the south, which the borrowers never repaid. Bank of Baroda bought out its
partners in IUB International Finance in Hong Kong in 1998. Apparently, this was a response to
regulatory changes following Hong Kong's reversion to Chinese control. IUB became Bank of
Baroda (Hong Kong), a restricted license bank.
The history of the Indian Bank also changed, like that of other 24 banks changed forever. The
main instrumentation of nationalisation was for a complete transformation for a rapid branch
expansion, decentralization of authority to make credit decisions, appointment of lead banks to
rejuvenate backward areas, priority sector lending, emphasis on lending to poorer sections of the
society without being unduly rigid about security cover etc. As a result its branches going up
from 239 in 1959 to 1000 in 1984. It was then the bank was nominated as one of the Lead bank

under the Governments Lead Bank scheme, and was made responsible for surveying the
potential , and arranging for grant of assistance to all viable projects, either through its own
branch other agencies. The bank also entered in the arena of merchant banking with a view to
providing specialized services to the corporate clientele in their expansion and diversification
programmes and capital programmes market forays. This service offered corporate counselling
and investment management. When the government felt the need for another set of banks to
carter to rural areas, accordingly the set up Regional Rural Bank with major shareholding, the
balance being met by the central and State Government.

Need for study

Turnaround of Indian Bank

Ranjana Kumar, as Chairman and Managing Director of Indian Bank, a 95-year-old bank owned
by the Government of India, managed one of the most significant turnarounds in performance in
the history of banking in India. With a negative capital adequacy of nearly 13%, Indian Bank was
considered one of the weakest banks in the year 2000, when Ranjana Kumar took over. Under
her stewardship, the bank has turned around successfully, achieving all the targets set under the
restructuring plan, including bringing the gross NPA down from 43% to 15% in less than two
years. Now we discussed about what are the lessons for the industry from such a turnaround in
the face of tremendous competition?. What were the challenges faced by the bank, and what
were the strategies that made this feat possible?

The Indian approach to restructuring has traditionally been recapitalization by the government.
In this case, however, the government decided to try a new approach, imposing conditions for the
disbursement of funds for the first time in banking history. An MOU was signed in which, among
other things, the unions and associations agreed to give the management a free hand, and funds
were to be disbursed only after a profit was shown. This ensured accountability and put pressure
on the bank to perform and, along with strategic decisions like merger of branches, delayering,
streamlining of internal processes and aggressive marketing, contributed to the success of the
restructuring plan. Innovative HR practices, training, and involvement and empowerment of the
staff and officers ensured their buy-in and participation in the process.
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 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 (Chart-1).
The trend: Operating/net profit (Rs./crores)

500

49.78
-390.65

-500

1993-94

399.66

391.55

291.61

-283.88

75.12
1994-95

Sum of Operating profit/loss

-223.68 -650.86-138.36
-389.09
-1044.37-209.5
-301.5
1995-96

1996-97

Sum of Net profit/loss

1997-98

-163.23
-778.5
-283.25
1998-99

Sum of Net worth

-1000
-1336.4
-1500

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.
The Trouble with Indian Bank

The decline of Indian Bank was, by no means, a sudden phenomenon. The operations of the bank
had been faulty for some time; by because of the financial and other forms of aid provided by the
GOI, they did come to light. The loopholes were first exposed by the introduction of the new
banking norms. Firstly, although the bank had a loyal customer base, it was thought that people
stayed with 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 primitive operations of Indian bank caused
customers

to

drift

away.

The report of the Working Group also suggested that some of the credit decisions taken by the

bank in the early 1990s were cases of misfeasance. Former Chairman and Managing Director
(CMD), M. Gopalakrishnan (Gopalakrishnan) was influenced by political considerations and
granted loans to some parties who would otherwise not have qualified for loans. This made some
of the loans granted during his tenure come under investigation. The granting of loans without
due consideration for the credit-worthiness of the client also led to a steep rise in the nonperforming assets (NPA) figure. In the mid to late-1990s, the gross NPA of Indian Bank
constituted about 37 percent of the gross advances - an unacceptably high figure and the highest
among public sector banks. Gopalakrishnan and some other employees of the bank were charge
sheeted in the late 1990s. While corruption weakened Indian Bank, the operational aspects also
left a lot to be desired. Indian Bank sponsored four Regional Rural Banks (RRBs) 5 under the lead
bank scheme initiated by the RBI. The losses of these RRBs increased the liability of the bank.
The bank also had three specialized subsidiaries - IndBank Housing Ltd, IndFund Management
Ltd and IndBank Merchant Banking Services Ltd, in the areas of housing, mutual funds and
merchant banking respectively. The poor functioning of these subsidiaries rendered the Rs 121
crores investment that the bank had made in them, a dead investment. Indian Bank also had a
liability to invest additional amounts in these subsidiaries, to meet client obligations.
Human Resources, thought to be the life-blood of any institution, were in a poor shape at Indian
Bank. Firstly, there were far too many people than were required and the ratio of the staff costs to
the bank's total income was well over 23 - considerably higher than stronger banks like Oriental
Bank of Commerce and Corporation Bank, where it was only around 10. The average age of the
staff in the late 1990s was 47 and the staff lacked motivation and initiative. Productivity per
employee was also relatively lower than better-placed banks. The bank needed an infusion of
enthusiasm and freshness but there had been no recruitment for a considerable time. In some
cadres, there had been no promotions for over 10 years, which compounded the problem of low
motivation In addition to this; there were several management glitches, which put a spoke in the
bank's progress. There was no system of succession planning and senior level officers were not
groomed to take over responsibilities as Executive Director (ED) or CMD at the same bank.
Because of this, senior managers did not associate themselves with the bank. The Board of
Directors was rather complacent and did not often question the working of the bank.
Appointments to the posts of ED and CMD were also irregular and the same people were given

constant

extensions.

A system-wide restructuring, therefore, became imperative to put Indian Bank back on its feet. In
2000, Ranjana Kumar (Kumar) was appointed as the CMD of Indian Bank. Kumar had begun
her career at Bank of India (head office at Mumbai) and was, at the time of her appointment to
Indian Bank, working as the ED of Canara Bank, another PSB based in the city of Bangalore.
Her wide exposure in banking, believed the RBI and the GOI, qualified her to take up the
challenge of turning the fortunes of Indian Bank.

Efforts at Restructuring
The Government of India put the Bank on a Restructuring Plan in June2000. 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).
Efforts at reviving Indian Bank began in July 2000 when the management, led by Kumar,
submitted a plan to the GOI detailing the steps it proposed to take during the three-year
restructuring period. Kumar requested the finance ministry for recapitalization funds, but the GoI
decided to defer it until such a time as 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.

Structural initiatives:

Merger/rationalization: Of 119 branches with nearby branches.

Introduction of VRS scheme: Relieving 3,295 employees.
Organizational structure: Four-tier structure converted into three-tier structure.
Implementation of credit intensive branches: To deal with corporate credit.
Segmentation of branches: As corporate, commercial, personal, and rural.
Subsidiaries: Sale of Indian Bank Mutual Fund, and taking over of IndBank
Housing by the Bank.

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.
Enforcing securitization 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.

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.

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.

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.

Corporate governance:

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

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.

Sub-committees of the Board: Audit Committee, Risk Management Committee, HRM
Committee, and Technology Committee formed to guide the Bank and exercise control.

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.

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.

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-the clock
customer care center 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 card 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.
Soon after that, the structure of the bank was modiSfied to make operations simpler and to
ensure speedy decision-making. The original four-tiered structure was modified into a threetiered one, by doing away with the zonal office level. The three levels in the new structure were -

head office, regional offices and the branches. This removed one level in the process of decisionmaking. Regional offices were also vested with more powers to enable them to take decisions at
their level and consequently, provide better services to customers. Similarly, branch
segmentation was also done to cater to the needs of various target markets. The branches were
segmented into 4 categories - corporate, commercial, personal and rural. To create a more
streamlined structure, several branches across the country were also merged. By 2003, 119 of the
total

1400

branches

in

India

had,,been,,merged.

In an effort to pare down excess staff and making the organization leaner, the bank implemented
a Voluntary Retirement Scheme (VRS). Through the VRS, the bank shed over 3400 employees,
bringing the staff number down to 22,400 by March 2003 from nearly 26,000 in 1999. The VRS
cost Rs 96 crores, part of which was paid as cash and part as bonds. Indian Bank also adopted the
practice of employing fresh MBAs for three months in summer, to provide a fresh view on
things. After eight years of no recruitments, Indian Bank conducted a recruitment drive for
probationary officers in 2003 and selected 250 people. The new officers were expected to join
the bank by early 2004. The bank also recruited 58 specialist officers like MBAs and BEs to
make operations more professional.
To bring down the huge NPA levels that were bogging it down, the bank took advantage of the
'securitization' Act passed by the Indian Parliament, to foreclose and seize assets. It issued over
700 notices to defaulters and confiscated 12 properties. Restructuring also involved the sale of
the Mutual Fund subsidiary to Tata AMC, a private mutual fund company, for around Rs 62 lakh.
The housing subsidiary was taken over by the bank for restructuring and its merchant banking
subsidiary was to be sold.
The bank also entered into a five-way tie-up with other public sector banks for sharing of ATMs.
(The other partners were Punjab National Bank, Bank of India, Syndicate Bank and United Bank
of India). "With this, the number of ATMs that an Indian Bank customer would be able to access
would go up to about 1, 000," said Kumar.6 On its own, Indian Bank had set up 75 ATMs by the
end of March 2003 and was planning about 30 more by the end of 2003. Plans were also on the
anvil for the opening of 10 new branches across the country by the end of 2003. To keep up with
private and foreign banks, Indian bank went on a technology drive and took up the
computerization

of

its

branches

across

India.

During the restructuring period, the bank began focusing on retail products, which it called
'structured loan schemes'. In 2001-2002, it introduced 12 new retail schemes for customers.
During 2001-02, it disbursed close to Rs. 1,020 crores under these. Home loans were the major
form of loans, followed by personal loans, trade finance and the like. To diversify its portfolio of
services, Indian Bank also entered into an agreement with HDFC Standard Life, to sell the latter
is insurance products. (Refer Exhibit-II for a list of the loans provided by Indian Bank in 2003).
The official Indian Bank turnaround period 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 years of losses. The
turnaround finally happened, when Indian Bank posted its first net profit of Rs 33 crores in six
years in 2001-2002. In fiscal 2002-2003, net profits increased by 468 percent to Rs 188 crores.
(Refer,

Exhibit-III).

In the Business Standard Annual 'Banker of the Year Survey' in 2003, Indian Bank was ranked
second on the growth parameter, no mean achievement for a bank which was in the throes of
losses half a decade ago. The honor was not surprising, considering the fact that 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 brought in
during the three-year period). There was also a considerable increase in deposits. Total global
deposits increased to Rs.27, 015.92 crore in 2002-2003 from Rs.24038.84 crore in 2001-2002.
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.

Encouraged by the progress achieved during the three years of restructuring leading to the
turnaround, 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 take place in early 2005.
EXHIBIT-II
LOANS OFFERED BY INDIAN BANK (2003)
Home
Educational
Professional
Vehicle
Consumer
IB
Salaried
Class
IB
Pensioners
Loan
Trade
Securities
Agricultural
Loan
Jala
Nidhi
Loan
Annapoorna & Aroghya Scheme
Source: www.indian-bank.com

Loans
Loan
Loan
Loan
Loan
Sentences
IndSmart
Loan
Scheme
Finance
Loan
Schemes
Scheme