 "R Koteeswaran")
The Reserve Bank of India, or RBI, earlier this month initiated non-credit prompt corrective action against Chennai-headquartered Indian Overseas Bank, or IOB. This means that the bank will face restrictions on branch expansion and recruitment, though there will be no curb on lending. The bank is being monitored by RBI on a monthly basis.
Such action gets triggered when either a bank's capital adequacy ratio falls below nine per cent, its net non-performing assets (NPAs) cross 10 per cent or return on asset falls below 0.25 per cent. IOB's return on asset was 0.02 per cent in the June quarter, though its capital adequacy ratio and net NPA, at 9.75 per cent and 9.4 per cent respectively, were within the threshold.
Analysis suggests that there are five public sector banks (PSBs) -Punjab & Sind Bank, IDBI Bank, Central Bank of India, United Bank and Dena Bank - and one old-generation private-sector lender, Dhanlaxmi Bank, which had return on asset of less than 0.25 per cent for the quarter ended June 30.
"IOB is as good or bad as any other public sector bank," says an IOB veteran. "Its exposure to sectors and entities is no different than many other banks." Then why has IOB slipped?
RBI seems to suggest, in its note that explains the corrective action, that the bank's top management should have been more proactive in arresting the decline.
The IOB management said it had created a "war room" with two general managers earlier this year and it expects the situation to improve by March-June 2016.
As a first step, he said, the bank is getting aggressive on recovery of dues from its borrowers. According to Koteeswaran, IOB made a recovery of about Rs 800 crore in the quarter ended March 31, but lost momentum in the subsequent quarters because of human resource issues (a large number of promotions and transfers), the severe summer and activities such as Jan Dhan Yojana.
Finding a fix
The good news is the problem can be fixed. In early 2013, RBI had taken similar action on United Bank of India (UBI) and had imposed restrictions on loan sanctioning. Earlier this year, the restrictions were lifted, though UBI is yet to come out of the woods. The Kolkata-based lender's gross NPAs are as high as 9.57 per cent, return on asset has been below the 0.25 per cent threshold for the last five quarters except for one, while its capital adequacy ratio was 10 per cent as on June end.
The government and RBI also need to do their bit. Inordinate delays in the appointments of MD & CEO have complicated the situation. The top post in IOB was vacant for four months: while M Narendra, the CMD, retired in August 2014, Koteeswaran joined only in December. (As of now, the MD & CEO's post is vacant in four public sector banks: Andhra Bank, Indian Bank, UCO Bank and Bharatiya Mahila Bank). In addition, the government should expedite the long pending reforms that were aimed at improving the governance of bank boards.
It is not that the bank didn't try to clean up its act. On the day before his superannuation in October 2014, ADM Chavali, IOB's executive director who was running the bank in the absence of a full-time CMD, told Business Standard he was able to clean up the balance sheet with a whopping Rs 890 crore provision towards bad loans that resulted in a loss of Rs 245 crore during the July-September quarter of 2014-15.
Chavali hoped now that he had cleaned up the books, the new chief could start with a clean slate and would not have to deal with the legacy issue that a public-sector bank CEO often faces after taking charge.
Challenges ahead
When Koteeswaran took charge as MD & CEO (the government had decided to split the post of CMD of public sector banks into non-executive chairman and managing director & CEO) on the last day of 2014, the government-owned lender was looking to revive its dwindling fortune in the new year. Losses, however, more than doubled in the next quarter (October to December) to Rs 516 crore, though fresh gross NPA additions, at about Rs 1,150 crore, were lower than the Rs 3,000 crore in the previous quarter.
Koteeswaran, like Chavali, is originally from Bank of Baroda where he spent around 35 years before joining as executive director of Bank of India a few years back. Bank of Baroda was one of the first public sector lenders to adopt technology and use it for business transformation.
Koteeswaran has an uphill task given that the economy is not looking good and all public sector banks have seen a rise in bad loans. Most banks have responded by beefing up vigilance on bad loans and continuously engaging with the customer. The efforts of IOB were clearly not reflecting in the numbers as bad loans piled up, capital eroded and return on asset fell.
Asset quality is a major issue for IOB. Not only are the gross NPAs high, but the situation looks worse if restructured accounts are included. According to data collected by the finance ministry, the stressed asset (gross advances plus standard restructured assets) ratio for IOB was 19.40 per cent as on March 31 - more than the average of 13.25 per cent for PSBs. Only Central Bank of India and UBI had more stressed assets that IOB.
