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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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 sometime, 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 non-performing 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.

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5] Specialized banks dedicated to the development of agriculture and other rural activities.