Indian Bank: The Anatomy Of A Turnaround

A look at how it is achieving this.

Last year, Indian Bank and Punjab National Bank (PNB) shocked the financial sector by declaring huge losses. Indian Bank had shown accumulated losses of Rs 1,712 crore and a non-performing asset portfolio of approximately Rs 3,000 crore. PNB had shown a loss of about Rs 700 crore.

Barely a year later, the controversial Chennai-based bank is showing definite signs of a turnaround. And although it is too early to quantifythe 1996-97 results are still awaitedbanking sector analysts predict that accumulated losses could have been brought down by 50 per cent during the year. What is more important is that the banks turnaround is being effected with little or almost no equity support from the government.

 

In fact, Indian Banks attempt at a turnaround is being seen as a greater challenge than the PNB case. In the case of PNB, the loss was largely the result of depreciation provided on securities that were marked to market during 1995-96. Since PNB has written back the depreciation during 1996-97, there is very little else to come in the way of the bank registering a profit for the year. (See box The write back conundrum on page 2)

On the other hand, Indian Banks turnaround, chalked out by Investment and Credit Rating Agency (ICRA) and implemented by the banks crisis management team, holds important lessons for the Indian banking industry. Hard experience shows that it is more the right pool of turnaround skill rather than capital support that can help revive banks.

In a sense, Indian Bank (whichunlike PNB was also weighed down heavily by bad debts) has been a test case of public sector banks abilities to cope with the challenge of a system that is increasingly being aligned to global norms of banking practice.

A multi-pronged problem

To understand Indian Banks turnaround strategy, consider, first, its problems. Indian Banks losses had wiped out its net worth. These losses were on three counts depreciation provided on securities marked to market, provisioning for non performing assets, and actual operating losses.

The first category of loss is notional. This has been the result of changes in depreciation norms on securities marked to market. Last year, the entire banking sector was asked to mark a minimum of 50 per cent of their securities to the market from 60 per cent at a cut-off yield to maturity (YTM) of 14 per cent. The previous year the prescribed cut off YTM was 12.5 per cent. This increase in marking to market and depreciation had to be provided from operating incomes, which led to operating losses.

The second category of losses was on account of advances that had turned sick. Under prudential accounting norms, which were introduced in 1992, advances are categorised as standard, substandard or loss assets. Also, assets that have two consecutive defaults cannot be taken into account for showing income.

Till 1992, under mercantile accounting practices, these assets would also have been treated as income- generating. This shift in accounting to an actual realisation basis compressed Indian Banks income, and reduced the banks operating margins. With Rs 3,000 crore of its assets not generating any income, these had to be provisioned as non performing assets.

In turn, this change in asset quality led to a major problem. Liabilities (deposits, in this case) had increased and income-generating assets had shrunk. Since a large portion of the liabilities were short term (46 days to one year), there was a severe asset - liability mismatch. Indian Bank could have used a standard method of liquidating some of its investments in the markets to exit from this mismatch. Unfortunately for it, the tight liquidity situation did not allow it this route even at a loss. Also, deposit growth was poor at the time.

This left the bank with the option of raising fresh borrowings to refinance its maturing liabilities. Indian Bank opted for the certificate of deposits (CD) route for refinancing its maturing liabilities and, as a result, CD-based liabilities increased to Rs 1125 crore for 1995-96.

All of this was at a high cost of over 16 per cent. The bank had little option on this score since interest rates were high at the time. But the result of this increase in interest expenditure and increased provisioning for NPAs was a net loss of Rs 1,336 crore for the period, adding to the huge accumulating losses.

The turnaround tonic

In its turnaround strategy, ICRA ruled out the traditional and drastic methods of recovery like asset stripping, particularly selling some real estate, which was what the Bank of America recovery programme did in the late eighties. An ICRA official explained: