INDIAN BANK - A Banking Phoenix

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Authors: Sanjib Dutta,
Senior Faculty Member,
ICMR (IBS Center for Management Research).

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A New Banking Regime

The two bank nationalization programs of the GOI (in 1969 and 1980), led to the strengthening of the banking sector by increasing the clout of PSBs. With branches numbering well over 60,000 and deposits of Rs 1, 10,000 crores, PSBs held a combined market share of 90 percent by the early 1990s. Private and foreign banks (which had begun operating in the country after the Industrial Policy Resolution of 1991 opened up the banking sector) could not dream of matching the hold the PSBs had on the Indian public. With the provision of timely governmental assistance, PSBs worked reasonably well, achieving most of the quantitative and social targets set out for them in the planned progress of India.

However, in the 1990s, the RBI and GOI realized that it would not suffice to measure the growth and success of PSBs in terms of quantitative and social targets alone. They realized that PSBs, operating as they did in a highly regulated and protected environment, did not measure up to international standards on certain parameters. This discrepancy seemed even more glaring when contrasted with foreign banks that had opened branches in the country in the 1990s, and posed a serious threat to PSBs with their promises of better service quality.

In a move towards helping PSBs achieve international standards in operations, the GOI introduced a series of financial sector reforms in 1992. The reforms laid down prudential norms based on internationally accepted practices relating to capital adequacy ratio (CAR), income recognition, asset classification and provision for impaired assets. Accustomed to working with the aid of the government, most of the PSBs found it difficult to meet these new requirements. In the first year after the adoption of the prudential norms, the profitability of PSBs as a group turned negative and 12 nationalized banks reported net losses. Out of the 27 PSBs in India only one could meet the required CAR limit of 8 percent. Things came to a head when, in fiscal 1995-1996, Indian Bank posted an industry record loss of Rs. 1336.4 crores and promptly came to be branded as the weakest PSB in the country.

To help PSBs cope better with the new operational norms, the GOI and RBI set up a committee headed by M.S. Verma (former Chairman of the State Bank of India) in early 1999, to study weak public sector banks and suggest measures for their revival. 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.

Indian Bank, UCO Bank and United Bank of India fell into the first category. The parameters on which the strength/weakness of the banks were determined are given in Exhibit-I.

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