Turn around for Indian bank

Pages: 6 (2218 words) Published: January 17, 2014
Indian Bank Turn Around:

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. 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...
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