I have pleasure in presenting your Bank's Annual Report and financial statements forthe year 2016-17. I would like to share with you the performance highlights and financialindicators of the Bank during the year as well as the outlook for the Bank going forward.
The IMF has forecast a higher Global Gross Domestic Product (GDP) growth at 3.5% in2017 compared with 3.1% in 2016. China recorded a stronger growth of 6.9% in Q1 2017while US recorded a slower annualized rate of growth of 0.7% in Q1 2017. China's domesticdemand was strong in the first quarter while private consumption growth decelerated inthe US. In the Euro Zone industrial production growth remained broad-based across themajor economies while unemployment rate continued to trend lower.
India's GDP is expected to grow at around 7.2% in FY18. Industrial production andcredit growth to industry remain weak in India and a pick-up in private investment wouldneed to be seen for GDP growth to come in significantly above 7%. However the new series(2011-12 base year) of IIP data with 5% increase in the financial year demonstrates arebound of industrial output in 2016-17. These signs of an upturn in IIP are encouragingas it is indicative of stronger manufacturing activity based on consumption demand.
Banking Industry in India
The biggest economic challenge facing the banking system is dealing with toxic assetsto the tune of Rs 7 lakh crore. Stressed assets which include bad loans restructureddebt and advances to companies that can't meet servicing requirements have risen to about17% of total loans. Gross non-performing assets as a percentage of gross advances rosefrom 3.2 per cent in 2012-13 to 8.4 per cent in 2015-16 for banks. Gross bank creditgrowth dropped sharply from 14 per cent in 2013-14 to 7.4 per cent in 2016-17. Investmentdemand is expected to pick up slightly helped by monetary easing government effortstowards infrastructure investments and public-private partnerships and the implementationof domestic reforms such as the introduction of the Goods and Services Tax (GST) Bill. Thegovernment is showing a renewed focus to address the asset quality problem in
the banking sector. The government through an ordinance provided the RBI with powers tointervene in the resolution of non-performing assets. RBI lowered the threshold forconsensus required among lenders in the Joint Lenders Forum (JLF) to approve resolutionproposals. These recent measures are likely to improve the efficacy of NPL resolutionmechanism and are a credit positive.
India will remain one of the fastest growing major economies globally. The real GDPgrowth will remain between 6.75% and 7.5% in 2017-2018. However high uncertainty aroundour global forecasts are due to the wide range of outcomes that could arise from significant shifts in policy on a number of domestic and international issues including tradeand immigration. Deeper structural changes like de-leveraging the corporate sectorrecognizing loss-making assets and recapitalizing banks would enable the Indian economy toset up a launch pad for stable future growth.
Outlook for Banking Sector vis-a-vis IOB
Bank credit should grow at two-and-a-half to three times the country's GDP but thathas not been the case in the past few years as the investment climate remained anaemic andmany large corporate houses remained over-leveraged. However the gross fixed capitalformation (GFCF) which indicates investment demand in the economy is forecast to grow by3.3% in FY17 jump to 6.8% in FY18 and FY19 with 8.8% growth and will be the major growthdriver. This is due to the key reform measures undertaken by the Government such as theimplementation of the Bankruptcy Law and the Goods and Services Tax (GST) higherinfrastructure push MIP on steel products revival of stalled projects etc. This isexpected to lead to revival in credit off take and improvement in asset quality of thebanking sector.
Our Bank will continue to re-orient our balance sheet with an increasing share ofretail loans and MSME and concentrate on lending to higher rated corporates within aprudent enterprise risk management and capital allocation framework as we focus oncapitalizing on growth opportunities while at the same time taking steps to addresschallenges in the environment.
> Business and Financial Performance Highlights - 2016-17
Total deposits stood atRs. 211343 crore as on 31st March 2017 asagainstRs. 224514 crore as on 31st March 2016 on account of the steps takenby the Bank towards reducing high cost deposits and bulk deposits with a view to reducethe cost of funds.
Gross Advances stood at Rs.156776 crore as on 31st March 2017 asagainst Rs.172727 crore as on 31st March 2016 as the Bank took a consciousdecision to be more cautious on large scale lending.
Operating Profit of the Bank has increased by 26.52% which is a good sign ofimprovement in operational efficiency. The multiple changes / transformation beingattempted by the Bank will further improve efficiency and Operating Profit.
While H1 Loss for the FY 2016-17 was Rs 2200 crore H2 Loss was Rs 1200 crore.Such a reduction in the second half of the year is an indicator of the multiple effortsunderway to turnaround the Bank.
Gross NPA as at 31st March 2017 is at 35098 crore with ratio of22.39% as against Rs. 30049 crore as on 31st March 2016 with ratio of 17.40%.One of the reasons for Gross NPA being relatively higher is the contraction of credit by9.23% as compared to the previous year.
Net NPA isRs.19749 crore with ratio of 13.99% on
31.03.2017 against Rs. 19213 crore with ratio at 11.89% as on 31.03.2016. Net NPA ason 31.03.2017 has reduced both in terms of percentage and absolute terms as compared to31.12.2016.
On the Recovery front the Bank has done fairly well by clocking recovery ofaround Rs 8710 crore for FY 2016-17 as against Rs 5872 crore for FY 2015-16.
The Bank was able to retain CASA ratio at 36.09% as on 31.03.2017 even onequarter after demonetization and the ratio has increased over March 2016 by 7.37%.
Core Retail of the Bank has shown y-o-y growth of 30.62% as against 26.65% as on31.03.2016.
Provision Coverage Ratio has improved to 53.63% as on 31.03.2017 from 47.39% ayear back.
Cost to Income Ratio has also improved to 57.37% as on 31.03.2017 as against63.53% as on 31.03.2016.
NIM stood at 2.03% as on 31.03.2017 as against 1.94% as on 31.03.2016.
Interest paid on deposits has decreased by Rs. 3224 crore over 1 year bringingdown COD to 5.88% for Q4 2016-17.
Yield on Advances has reduced from 8.32% to 7.83% y-o-y and in quantum by Rs.2609 crore despite having 22% Gross NPA and this is mainly due to arresting revenueleakage by strengthening system based revenue recovery and recovery and upgradation of NPAaccounts.
Overseas Branches have turned around and made an annual profit of Rs. 44 crore.
All targets under Priority Sector lending and Agriculture lending have beenachieved.
> TURNAROUND STRATEGY
With the guidance and oversight of an experienced and professional Board the Bank hasfi nalized a Turnaround Strategy with special focus on the following areas to improve theoperating efficiency and productivity of the Bank:
1. Technology issues and leveraging
Digital Transformation and Digital Penetration to economize operational cost.
In the short term Bank has planned to stabilize the IT Platform and it has beenachieved to a great
extent improving the delivery across the branches. The alternate delivery channels arebeing spruced up to improve the availability and the plan envisages improvement in themedium term.
Our Bank is the fi rst PSB to have migrated to latest version of Finacle CoreBanking which is poised to leverage the ease of operations. Bank is also planning tointroduce workflow automation for process efficiency and higher productivity.
2. NPA resolution and NPA Management
Focus areas for NPA Management are :
Targetting Substandard assets with special thrust on recent slippages forupgradation
Intense focussing on NPA accounts Sole financed accounts Consortium accountswhere we are the Lead Bank Chronic NPA accounts where provision is 100% NPA accountswhere migration provision is likely in 2017-18
Effecting recovery through Lok Adalats Recovery Camps Recovery drives etc.
Recovery cum resolution in NPA accounts with functional units / continuingactivity
Targetting NPAs on priority in sectors showing revival signs
Optimal utilisation of Debt Recovery Agents
"Out Reach" program to reach out to NPA borrowers by the branch team
Special full time Recovery Teams with 10 to 15 members in each region
Android app with "NPA details" to each staff for follow up andrecovery on the move.
3. Credit monitoring and arresting fresh slippage
Created dashboard with latest overdue status along with borrowers contactdetails for follow up.
Trigger automatic SMS to overdue accounts
4. HR management and HR development
For higher productivity through manpower management HR has been bifurcated intoHRDD (Human Resource Development Department) and HRMD (Human Resource ManagementDepartment)
HRMD with automated solution handles all routine HR matters
Special focus on succession planning and mentoring of the IOB young team
5. Leverage Capital & Business growth
Business Consolidation by rebalancing the credit portfolio between CorporateCredit & Retail lending and MSME. Bank's turnaround strategy is focused on augmentingfee based income and improving credit growth with accelerated growth in retail and
MSME while not losing sight of Mid Corporate and Large Corporate. As part of thestrategy Bank has established Back Office at Ernakulam and Trivandrum to strengthen theMIS and improve turn around time for Account Opening. Specialised Retail Marts have beenestablished in 50 branches across the country for capturing higher volume of retailcredit.
Increase credit card base for increase in fee based income/interest income
Bank has introduced a New Scoring Model for the new MSME and Retail forselection of good entrepreneurs/ borrowers at the initial stage of processing. Thrust isbeing given to MSME sector by identifying clusters for cluster based fi nancing which hasalready been implemented by the Bank in the state of Gujarat and Tamilnadu. MSME nodalofficers at Regional offices are monitoring to ensure quick disposal of proposals and tocover more MSME advances under CGTMSE cover etc.
Generating Income by expanding credit in light capital assets such as lending to"A" rated borrowers Zero Risk Weight assets - Jewel Loans Loans against liquidsecurities Central Government guaranteed loans retail & MSME segments.
Enhancing profitability by shedding high cost and bulk deposits
Reduction in administrative costs and employee cost with resource optimisation
Medium term measures have been taken to reduce cost of deposit and improve CASAand the journey so far has been successful in this direction.
Bank is aggressively concentrating on cost reduction by reducing the number ofloss incurring branches as well as rationalisation of branches and administrative offices.
Demonetisation is expected in the long run to have a positive effect on the economy andwill help foster a digitised economy.
The withdrawal of legal tender character of old Rs 500/1000 notes from November 9 2016has resulted in improved liquidity for the Bank and led to increase in CASA and reductionin cost of deposits.
This has triggered higher adoption of digital transactions and more number oftransactions are undertaken using mobile and internet based solutions. All digitalproducts of the bank grew. Debit Card transactions increased by 51%. POS basedtransactions increased by 176%. Internet Gateway Transactions increased by 60% and MobileBanking by 23%.
> Awards and Accolades won by IOB:
The Skoch Order of Merit for the IOB's CBS Migration Project was awarded on16.12.2016 and adjudged amongst the "Top 100 Projects in India for the year
2016"during the 46th Skoch Summit organized with the underlying theme of"Transformational Technologies and Sustainable Growth".
The Express Intelligent PSU Awards was awarded to IOB for winning the TechnologySabha PSU IT Award under the category Enterprise Application and presented at theTechnology Sabha PSU event held at Hyderabad on 19.11.2016 .
IOB In-House magazine "VANI" (Official Language) has been given Firstprize from Reserve Bank of India for the year 2015-16 which was awarded in March 2017.
I take this opportunity to thank the members of the Board the Government of India andthe Reserve Bank of India for their valuable support and guidance which has helped theBank to face challenging times. I thank all our customers for their continued patronageand the opportunity given to us to serve them and further our business relationship. Ialso place on record my appreciation for the dedication and commitment of our staffmembers and take this opportunity to call upon each and every one of the staff tocontribute with deep involvement as the Bank aggressively focuses on turnaround of theorganisation.
We continue to rely on the valuable support and encouragement of all our stakeholdersas we strive to effectively take forward the Tyurnaround Strategy of the Bank.
With warm regards
Managing Director & Chief Executive Officer