Finance Minister Yashwant Sinha has assured that government will not close down any public sector bank. The government has paid homage to fiscal transparency by not smuggling in recapitalisation of the weak banks on March 31, 2000. In 2000-2001 the government would be committed to a Fiscal Responsibility Act and, therefore, would not make any large disbursals for bank recapitalisation without a full parliamentary debate. The Indian Bank is clearly a basket case and rather than trading generalities on weak banks there is a need to focus specific attention on Indian Bank.
While Indian Bank has been devastated by large losses it is necessary to candidly discuss its strengths and weakness which would provide some clues as to how to deal with the problem. Advocates of asset reconstruction would like to believe that once the loss assets are segregated, the sick pony would transform itself into a race horse. The history of Indian Bank has been punctuated by recurring bouts of bad lending. The bank probably has an effective zero income from its lending operations net of providing for all losses, including those which have not as yet been allowed to surface. This statement would no doubt be challenged by the advocates of credit expansion but the fact is that there is no financial wizard who can make this bank transform itself into a good lending bank. Any viable programme of reconstruction must be based on the assumption that there would be a water-tight stipulation that the level of lending would not be allowed to increase over the March 2000 level.
It would also need to be assumed that the bank would concentrate on its forte, viz. customer service to its depositors. This explains why it has a strong depositor loyalty. It is rare to come across an irate depositor of Indian Bank. The bank has a long history of good customer service ingrained in its staff and its basic strength is the positive work culture of its tellers. The franchise of Indian Bank is quick, efficient and pleasant service to the Savings Bank deposit holders. To survive, the bank obviously has to cash in on this major strength.
As of March 2000 (as provided to the Verma Panel) deposits are Rs 16,819 crore, advances Rs 8,090 crore, investment Rs 8,054 crore and the cash reserve ratio (CRR) balances with the Reserve Bank of India (RBI) at Rs 1,175 crore (assuming an average effective CRR of 7 per cent). With gross non- performing assets (NPAs) of 37 per cent of advance there is no reason to assume that fresh lending would be free from NPAs. It is reasonable to assume that the interest income on advances would be eaten up by losses and need for provisions. The visible NPAs are, in all probability, the tip of the iceberg and by sheer attrition of time more NPAs would emerge out of the existing lending and the losses would mount and provisioning would increase as assets graduate over time from sub-standard to doubtful and loss assets. In such a milieu, it would be dangerous to allow the outstanding level of lending to expand. Furthermore, the bank has probably not made full provision for superannuation liabilities to its employees.
At the present time, current accounts are around 11 per cent of total deposits while savings deposits account for about 21 per cent and term deposits 68 per cent of the total. The average effective cost of funds is 7.1 per cent while the return on funds is only 5.00 per cent (assuming a 10 per cent average return on investments, and a net return of zero on advances (adjusting actual interest earned minus provisions). Thus, there would be a negative interest spread of 2.1 per cent. I am well aware that staunch advocates of expanding lending operations would vehemently refute these calculations and claim that the past is no guide for the future and that we have a brave new world of zero incremental NPAs. I am afraid this is a sheer pipe dream.
Now such a hopeless situation cannot be rectified in a year or two. It is going to take at least a decade to reverse the adverse features. If deposits grow by 10 per cent per annum they would total Rs 43,561 crore by 2010. It would be reasonable to conclude that by 2010 the CRR would be down to 3 per cent. If the bank eschews from any lending beyond the March 2000 level, investments would total Rs 34,165 crore and as such the return on funds would be 7.8 per cent. With the cessation of further lending the current accounts could be projected to fall to zero. The endeavour should be to make Indian Bank essentially a Savings Bank. Of total deposits, savings deposits would amount to 70 per cent and term deposits 30 per cent. Furthermore, the maximum term deposit rate should be one half of one percentage point below that offered by the State Bank of India. On this basis the average effective cost of funds would be 5.3 per cent. Thus, the interest spread would be positive 2.5 per cent.
If the bank were to eschew from any recruitment upto 2010, the work force would be down by 30 per cent by attrition of retirements. A wage sacrifice would need to be worked out in terms of a move away from an industry settlement. Any contribution to a Voluntary Retirement Scheme (VRS) should be considered only to the extent of a reduction in the work force. over and above the annual attrition rate of 3 per cent. Any recapitalisation of the bank should be examined three years after the recovery programme is launched and should be conditional on the bank not making any net losses. The recapitalisation should be very gradual and just sufficient to meet a phased programme of capital adequacy tailored by the RBI to ensure that Indian Bank attains the industry average in say 10 years. While a 10-year period appears too long, the devastation is so extensive that any shorter recovery programme would be unrealistic. Moreover, what is envisaged is a slow bootstraps operation rather than a quick bail out by the government.
It is necessary to undertake the reconstruction on the basis of the areas of strength of the bank which are customer service and depositor loyalty. In contrast, while dealing with borrowers, who are fair weather friends, the bank should not hesitate to shed even good accounts as the so called good accounts include potentially sick units. Thus, the bank would be protected to the extent that it does not undertake any further lending activity. The reprieve out of the Death Row is merely a commutation of a sentence and the bank should recognise that it has to operate in a restricted area. It is essential that we refrain from attempting to make every sick pony into a race horse. The stakeholders of Indian Bank ultimately are the depositors and transforming the bank into a Savings Bank is the best assurance that the bank can give to its depositors.
