Indian Banking's Next Two Revolutions

Many Indian villages have over one thousand mobile phones. But no bank accounts.

Welcome to the great Indian revolution.

Even after the sweeping changes brought about by NREGA – the second version of which made bank accounts mandatory – real financial inclusion remains a dream.

Thanks to NREGA, many of India’s poorest of the poor now recognizes the use of a savings account. But that a bank can lend them money to meet their financial goals – even if it is microfinance - is unknown by many. A recent nationwide survey had brought out these shocking facts.

Why couldn’t the country’s public sector banks achieve within 60 years, what a handful of private mobile operators could do in 6?

The easy answer would be the scope for profits, but given the wafer-thin margins with which these large capex mobile operators function, and the efficiency with which many private micro-financiers have developed their businesses recently, bankers would need to find another excuse.

Reserve Bank of India is aware of this challenge, and is now trying to address this in two novel ways, which if fully implemented can change the very landscape of Indian banking, not to mention the achievement of amazing levels of financial inclusion.

One of the RBI strategies would seem like a throwback to the pre-nationalization era. Yes, new private banks are again welcome. But they would be back in a different avatar – Local Area Banks.

Originally conceived in the 1996 Union Budget, local area banks had got a major push with the findings and recommendations of the Raghuram Rajan Committee. RBI plans to address the safety concerns with small private banks by ensuring a higher Capital Adequacy Ratio (CAR) of above 15% - as against regular banks’ 12% - and tough regulations to prevent related party transactions.

If implemented fully, this can be a wave of opportunity for a new generation of financial entrepreneurs, cooperatives, and self-help groups. The distinct advantage RBI sees with the move - other than great accessibility – is the creation of tailor-made financial products based on local demand.

The second RBI initiative was their recent Outreach Program to commemorate their Platinum Jubilee Year. Designed around Governor Dr. D Subbarao’s Zero Finance Inclusion System, the program had inputs from all four Deputy Governors, Shyamala Gopinath, Usha Thorat, Dr. KC Chakrabarty, and Dr. Subir Gokarn.

The program has placed a new target for commercial banks that all villages with over 2000 people should get access to financial services by March 2010. Carefully selected and authorized NGOs would be allowed to assist banks in achieving this target. The critical backbone of this initiative would be cutting-edge technologies like mobile banking and biometric identification.

If RBI succeeds in these two initiatives, it would lend some credence to the tall claims of economic liberalization and the telecom / IT revolutions. Then and only then can we take the first step together, as one billion empowered people.

Because for all our optimism, there is a deep chasm between the developed and developing worlds, and that chasm is the financial security of a country’s people. And financial inclusion is the first step towards financial security.

Indian Banking's Next Two Revolutions

HDFC Move Too Little, Too Late Against SBI & ICICI?

HDFC Ltd, India's largest home loan provider, and the key promoter of HDFC Bank, has done something to counter SBI, but it might prove to be too little, too late. The dual rate home loan scheme comes with a fixed rate of 8.25 per cent till March 31, 2012 for a 20 year loan of 30 lakh for new customers who apply till January 31. Though 0.25% above SBI's during the first year, the scheme is comparable to SBI's when taking into account the first three years. But it is still inferior in its 0.5% processing fee against SBI's nil charges.

HDFC Bank always had to be content with the No.3 position, behind SBI and ICICI Bank. But the solace was always that it could lead in two retail segments – home and auto loans. But now, even that edge is showing signs of distress.

While SBI has recently caught up with HDFC Bank in both home and auto loan growth, ICICI Bank has also made a dramatic comeback. To counter, HDFC Bank is relying more and more on growing their overall retail loan business, instead of trying to grow their corporate loans, where the competition is even tougher with the likes of PNB & BoB, apart from SBI & ICICI Bank.

The bank’s over reliance on retail segments like credit cards is troubling, and as Pralay Mondal, their Country Head for Retail & Credit Cards had recently put it, the delinquency for the credit card industry as a whole is at 30-35%.

HDFC Bank’s key problems are its highly pressured workforce and the private bank’s too selective, too restrictive home loan policies that pre-empt a significant percentage of homebuyers from a life-critical home loan.

HDFC Move Too Little, Too Late Against SBI & ICICI?

Will Bank of India Take Over Oriental Bank of Commerce?

With its second quarter results out, speculations that Oriental Bank of Commerce might be fit for a takeover have gathered wind.

OBC went back on its good first quarter results of 46% growth by registering only 18.63% growth in net profit during the quarter ended September 2009. The bank’s total business growth during H1 of this year stands at 24%.

Making this mid-sized bank more attractive for a takeover is the fact that OBC is in urgent need for Rs. 1000 crore as capital support from the Government. Though Chairman & Managing Director TY Prabhu has claimed that it is for branch expansion, shoring up Oriental Bank’s Capital Adequacy Ratio (CAR) should also be a prime reason.

But plagued with such never ending requests from several public sector banks (PSBs), the Government has recently made it clear that it may not be able to meet the entire demand. That leaves only a few options before such PSBs, one among which is allowing a takeover by a bigger PSB.

Speculations are on that Mumbai headquartered Bank of India is eyeing Oriental Bank of Commerce for a takeover. Such a move has got some other rationale too, as BoI’s is heavily West focused while OBC is heavily North focused.

But, in any case, such a move is unlikely to be met favourably with the senior to middle level managers in OBC.

Oriental Bank of Commerce is a full service bank, featuring anytime anywhere banking that addresses retail, corporate, & industrial clients using the latest in technologies like core banking, internet, mobile, & ATMs. CMD TY Prabhu is a Canara Bank veteran, who joined OBC recently after a successful tenure with Union Bank of India as its Executive Director.

Oriental Bank of Commerce has always been in the forefront of social initiatives, be it participation in the national pension plan or poverty alleviation for the BPL classes. The bank is also on a major expansion drive with a new recruitment drive being announced.

OBC’s innovative bancassurance model – but partnered with two banks itself, HSBC and Canara Bank – has already become the fastest grower in the life insurance sector.

However, if the takeover by Bank of India materializes, it will fly in the face of the OBC management’s plans to increase branch strength by 200 new branches and a targeted business mix of Rs. 2,00,000 crore by the year end.

Will Bank of India Take Over Oriental Bank of Commerce?

Kotak Mahindra Thrives on Risk?

Kotak Mahindra Bank led Kotak Mahindra Group is one financial conglomerate that seems to thrive on risk.

Group entity Kotak Securities had recently played whistleblower in exposing accounting holes in both Reliance ADAG and Reliance Industries. But as and when the Ambani brothers bury their hatchets, a headache can break out for Kotak Mahindra.

But for all his team’s research capabilities, Uday Kotak couldn’t sense what was in store in Dubai. Kotak Mahindra Bank opened their representative office in Dubai two weeks back. The timing couldn’t have been worse. A week later, Dubai World’s $60 billion hole surfaced, with the potential to sink Dubai with it.

But risk is nothing new to Kotak Mahindra. The Group already has exposure in Dubai through businesses like insurance policies, offshore mutual funds, broking revenues, and other investments.

This once non-banking financial company (NBFC) – or private financier – turned bank thrives on high risk. It specializes in acquiring stressed assets from other banks, unsecured loans, sensitive sector lending, and aggressive contrarian strategies like shunning loan restructuring against NPAs.

Uday Kotak has ambitiously built this 18,000 people empire, resorting to corporate moves like courting powerful names like the Mahindras and Goldman Sachs, and later deciding to go it alone.

Kotak Mahindra Thrives on Risk?

Will IndusInd Ever Catch Up With ICICI, HDFC, & Axis?

During the initial years it was main promoter Hinduja Group’s controversies like Bofors that played spoilsport for IndusInd Bank. Later, it was a case of uninspired leadership. But the current MD & CEO Romesh Sobti’s radical strategies have apparently played out well for the bank, if last two quarters’ growth is any indication.

But it is also a strategy that has taken IndusInd from the safe shores of investment banking and HNI business to the risky coasts of less secured retail loans. It remains to be seen how IndusInd’s new strategy will pan out.

IndusInd Bank started out in the same year – 1994 – as ICICI Bank, HDFC Bank, & Axis Bank, with almost the same scale of capital. But now all those banks are at least 5 to 10 times the size of IndusInd. That this was despite Hinduja Group’s international expertise in banking, has been a sort of riddle in banking circles.

But with the second quarter results out, IndusInd Bank has proved that it can shrug off this lethargy and grow faster than others to catch up on lost time. IndusInd grew its net profit by 131% this quarter, and it was one of the healthier all-round results posted by any private bank or comparable public sector bank.

The even better news is that when taken as a whole, the two quarters or H1 has registered a 211% growth. With this, IndusInd has become the country’s fourth fastest growing bank in net profits.

But the bank still lags behind peers in deposits and advances growth. MD & CEO Romesh Sobti needs to address several of IndusInd’s potentials that haven’t still played out.

For example, IndusInd Bank is the country’s only bank to be originally promoted by a group of NRIs. Despite this significant exposure among the NRI community, the bank had failed to put up a good performance in garnering NRI remittances, which is always considered as a good source of low-cost funds.

Also, IndusInd Bank has always played the game conservatively, with not much enthusiasm for funding the so-called sensitive sector including unsecured retail, real estate, and capital markets. Such an outlook has prompted the bank to take a contrarian view on problematic NPAs. IndusInd was noted for opting out of the CDR process to revive Subiksha, the troubled retailer.

Anyway, under Sobti’s leadership, the bank is spreading its focus on segments like consumer loans. The bank was however always strong in investment banking and servicing HNIs, and this has helped them to grow faster now.

Will IndusInd Ever Catch Up With ICICI, HDFC, & Axis?

Midsize Public Sector Banks Survive Downturn

2008-09 and the ongoing 2009-10 have not been easy years for the country’s mid to small sized public sector banks. Yet they have shown remarkable resilience in fighting back the downturn with all available tools at their disposal.

Good examples of this trend have been Bank of India and Central Bank of India on the big side, and Indian Overseas Bank and UCO Bank on the smaller side.

These tools include profit from treasury operations, profit from wholesale banking, cutting cost of deposits, and managing NPA levels.

Using these tools, as well as growth in their core banking business, Mumbai headquartered Central Bank of India’s net profit rose from Rs. 96.15 crore a year ago to Rs. 313.93 crore. The bank could better its treasury operations, as well as its wholesale and retail banking operations.

At another Mumbai headquartered major, Bank of India, the core metric of net interest income (NII) increased by 3.37% to Rs. 1409 crore. But BoI opted for higher provisioning for its NPAs this quarter, which pulled down its net. But since then, the new RBI directive of 70% Provision Coverage Ratio (PCR) has made the bank look wise among its peers.

Chennai based Indian Overseas Bank (IOB) could have posted an operating profit of Rs. 554.6 crore, but the exceptional case of the absorption of the loss making Shree Suvarna Sahakari Bank dragged down its net profit to Rs. 176.04 crore. IOB was handpicked by the Government earlier to save SSSB.

However, Kolkata based UCO Bank had a smoother sail this quarter. Net profit was up by 38.4% on strong growth in interest as well as treasury income. The bank is rapidly shedding its high cost bulk deposits, and managing its NPA levels quite well. Total income grew over 19%, while operating profit was up by around 50%. Now the bank is working hard to increase the competitive metric of net interest margin (NIM) to 2.15% from the current 1.88%.

Midsize Public Sector Banks Survive Downturn

SBT: Of Keralites, By Keralites, But Not For Keralites?

State Bank of Travancore is Kerala’s official bank if there is any such designation. It was created by eminent Keralites, and still thrives on Kerala’s huge NRI and domestic deposits. But when it comes to loans, SBT prefers to help corporates outside the state, often through big-ticket loan syndications. Ditto is the case with the bank’s customer service – winning accolades outside the state, and drawing flak inside Kerala. Is it something wrong with State Bank of Travancore or something wrong with Keralites? Are they expecting too much from their own bank?

Kerala headquartered SBT is not only a worthy child of the State Bank family. It is also a worthy adult with a mind of its own. Mergers are not something for State Bank of Travancore, which has taken into its fold not less than 10 banks during its 64 years of existence.

But this time, things would be different, no doubt, as it would be SBT which would be taken in by its parent since 1960, State Bank of India. But that merger is still far off, as SBI has prioritized the takeover of smaller, unlisted, and less healthy group banks than State Bank of Travancore like State Bank of Indore, State Bank of Hyderabad, and State Bank of Patiala.

SBT on the other hand is a listed entity, and has the unique credentials of never failing to make a profit and never failing to deliver dividends in its history.

But FY 2008-09 and the present year should be exceptions, anyone will agree. But at SBT, there is no need for such exceptions. For 2008-09, State Bank of Travancore registered a rise in net profit of 57.43% and a dividend payout of 130%. It was a record, and it clearly showed the bank team and its leadership could effectively rise up to the challenges.

And in 2009-10, this momentum only continues to gather steam with SBT posting a 337% rise in Q1 YoY.

SBT’s Managing Director AK Jagannathan is a veteran of the State Bank Group, having worked in State Bank of Mysore, State Bank of Hyderabad, & State Bank of Patiala, before taking up the assignment of Chief General Manager of State Bank of Travancore in October 2008 and later as its Managing Director. He is the perfect complimentary partner to SBI’s & State Bank Group’s Chairman OP Bhatt. Incidentally, Bhatt was the MD of SBT before moving to SBI in 2006.

State Bank of Travancore is known for its support for sensitive sectors, and was recently noted for surpassing its targets in delivering loans to farmers. At the same time, it caters to the diverse needs of its modern customer base. Recetly SBT tied up with Sundaram BNP Paribas to deliver their mutual funds through SBT branches.

State Bank of Travancore is a full service bank complete with core banking, internet banking, mobile banking, ATMs, home loans, vehicle loans, multi-city cheques, online tickets / bill payments, 3-in-one savings / demat / trading accounts, e-Tax, microfinance, MSME financing, reverse mortgages, and international credit / debit cards.

Owing to its presence in Kerala, SBT also has one of the most extensive NRI and Forex services in the country.

SBT: Of Keralites, By Keralites, But Not For Keralites?

Midsize Public Sector Banks Fight Downturn

2008-09 and the ongoing 2009-10 have not been easy years for the country’s mid to small sized public sector banks. Yet they have shown remarkable resilience in fighting back the downturn with all available tools at their disposal.

Good examples of this trend have been Bank of India and Central Bank of India on the big side, and Indian Overseas Bank and UCO Bank on the smaller side.

These tools include profit from treasury operations, profit from wholesale banking, cutting cost of deposits, and managing NPA levels.

Using these tools, as well as growth in their core banking business, Mumbai headquartered Central Bank of India’s net profit rose from Rs. 96.15 crore a year ago to Rs. 313.93 crore. The bank could better its treasury operations, as well as its wholesale and retail banking operations.

At another Mumbai headquartered major, Bank of India, the core metric of net interest income (NII) increased by 3.37% to Rs. 1409 crore. But BoI opted for higher provisioning for its NPAs this quarter, which pulled down its net. But since then, the new RBI directive of 70% PCR has made the bank look wise among its peers.

Chennai based Indian Overseas Bank (IOB) could have posted an operating profit of Rs. 554.6 crore, but the exceptional case of the absorption of the loss making Shree Suvrana Sahakari Bank dragged down its net profit to Rs. 176.04 crore. IOB was handpicked by the Government earlier to save SSSB.

However, Kolkata based UCO Bank had a smoother sail this quarter. Net profit was up by 38.4% on strong growth in interest as well as treasury income. The bank is rapidly shedding its high cost bulk deposits, and managing its NPA levels quite well. Total income grew over 19%, while operating profit was up by around 50%. Now the bank is working hard to increase the competitive metric of net interest margin (NIM) to 2.15% from the current 1.88%.

Midsize Public Sector Banks Fight Downturn

Why SBI Gets No RBI Waiver on NPAs, PCR

Does India's central bank, Reserve Bank of India, believe that nobody is too big to fail?

Post Lehman, post Merrill Lynch, & post RBS, the biggest joke doing the rounds in banking circles has been nobody is too big to fail. Because, whenever some wise mind tried to point out the risky games these giant banks played, the stock reply was, “Nah! Too big to fail”.

Now it seems that this newfound cautionary syndrome has caught up in India. The country’s central bank, RBI, often noted for its excellent and dynamic banking regulations has now come up with a stunner – all banks have to set aside funds to cover 70% of the total worth of bad loans. Technically called Provision Coverage Ratio (PCR) for Non Performing Assets (NPA), this has earlier been anything between 10-100%, with the average being 51%.

But some banks like, the country’s biggest – State Bank of India – always had a problem with this line of reasoning. Until recently, their PCR has been just 38.72%, and only on RBI prodding a couple of months back that it was hiked to the present 45.1%.

But Reserve Bank of India is still not impressed. There is no waiver even for the country’s largest bank that controls nearly one-fourth of Indian banking. SBI’s profitability is going to be hit, as the bank will have to set aside Rs. 3800 crore from their profits.

State Bank of India Chairman OP Bhatt has always maintained that his bank’s PCR is small due to the better quality of their NPAs. But conservative peers like Punjab National Bank (PNB) have set aside 90% and HDFC Bank has set 68%.

Anyway, why is Reserve Bank of India so adamant about 70% PCR? One reason might be the Indian banks’ aggressive new initiative to woo millions of home-loan seekers with an ascending interest rate pattern. SBI had pioneered this scheme, and received wide applause for it.

But this kind of loans where the interest burden starts light and gets heavier over the loan-term is said to be a major contributor to the subprime home-loan crisis in US.

Just imagine a couple in their 40s, taking a Rs. 40 lakh home loan in 2009. For the first four years, everything goes fine, and after that the higher interest regime sets in, just-in-time when their other burdens like children’s higher education / marriage sets in, and their employability and earning capacity decreases.

Is RBI foreseeing this scenario in India?

Why SBI Gets No RBI Waiver on NPAs, PCR

ICICI Bank's Real Turnaround Still Away?

There is nothing more sacrosanct than quarterly results. It separates the listed from the unlisted entities, the men from boys. Because, the latest quarterly results increases or decreases that revered number – TTM EPS – or trailing twelve months’ earnings per share, the ultimate metric that shows the investors what they are getting for their investment.

Take for example ICICI Bank. For the quarter ended September 2009, ICICI has come up with impressive numbers. Operating profit was up 18% QoQ and 6%YoY, net profit was up 2.6%, net interest margin (NIM) was maintained at 2.5%, net NPA was down 6.2%, and CASA deposit percentage was up to 36.9% from 28.7%.

On the whole it comes out as solid results. Even the stock markets reacted favourably, for a couple of days. Chanda Kochhar even began hoping for a bonus for her hardworking team this year. In 2008-09, they had missed their bonus, while at the end of 2007-08, then CEO & MD KV Kamath had been paid Rs. 43.24 lakh, while Kochhar reportedly was paid Rs. 22.44 lakh.

But a look at the quarter with more realistic glasses, yields a different set of results. Total income fell 12.7%, fee income declined 26%, loans contracted 14% YoY, net interest income was down 5% YoY, and ratio of net NPAs to loan assets rose from 1.9% to 2.36%.

More interesting are the positive numbers of net profit and CASA deposits. Headline profit was up mainly on a huge relative growth in treasury income, compared with Q2 of 2008-09. Then treasury was at a loss of Rs. 153 crore, while this time it posted a profit of Rs. 297 crore. And the real reason why CASA percentage rose was this – its total deposit base shrunk by 11.45%.

Not that ICICI Bank did any jugglery on these numbers. Anyone in their position would highlight the good figures and downplay the bad ones. But what matters is the way different media has opted to cover the numbers.

There was a core message in the real numbers of ICICI Bank, and it was this – the planned turnaround hasn’t started delivering in their core businesses.

Even worse is the impact the new provision control ratio (PCR) will have on ICICI Bank’s bottomline. The estimated Rs. 1800 crore extra provisioning required by the bank to meet the 70% PCR can wipe out around 35% of its current annual profits, some reports say.

ICICI Bank’s is not a lone case as far as confusing quarterly results is concerned. The media and the markets want to project the good side of friends. But the fact that, in India, quarterly results are still unaudited should be another cause for concern. Because of this, developed markets have started looking at EPS with suspicion, and instead looking only at Cash EPS, and the corresponding P/C, instead of P/E.

Not that Cash EPS can’t be tampered. It is difficult and would take a concerted Satyam like effort.

ICICI Bank's Real Turnaround Still Away?

Surgery, not Medicines, for IFCI

As a developmental financial institution, IFCI helped build some of India’s critical projects. But is today’s IFCI groping in darkness, unable to find a sustainable business model?

With Government calling for the induction of a strategic investor in IFCI urgently, the problems plaguing the developmental bank are once again in the spotlight.

It is not clear what prevented IFCI from following the route of ICICI and IDBI in converting themselves to private banks, which is in fact an international model, as developmental financial institutions became unviable.

Though IFCI’s profits have halved during the past year, its holdings in other companies should fetch it good returns in the long term. But there are no indications yet from IFCI on how to utilize these stakes.

Despite IFCI unable to replay a Rs. 1573 crore loan from Government at 0.1% interest rate, and despite it being converted to a grant, IFCI is still in doldrums, signaling a serious asset-liabilities mismatch. Restructuring has been in place since 2002, at the expense of further growth.

Some IFCI promoted subsidiaries have also run into problems, a recent example being their asset reconstruction company, Asset Care Enterprise, facing rejection from RBI about a nearly 50% divestment.

Questions to CEO Atul Kumar Rai’s office on these issues went unanswered at the time of publication.

IFCI also needs to develop a brand equity leveraging on its contributions to many of country’s critical projects.

Surgery, not Medicines, for IFCI

Will ING Vysya’s Prospects Improve Anytime Soon?

There is no doubt that ever since its start in 2002, ING Vysya Bank has been an underperformer compared with its peers in the country’s private sector banking.

Despite having a big ticket international name of ING, this new generation private sector bank - which was in fact a marriage between an old generation private bank, Vysya Bank, and the Dutch banking major, ING - has been able to come up with only lackluster performance.

It was almost a squandering of an opportunity as ING Vysya was the only almost foreign bank that was allowed to operate as a fully Indian bank, complete with the inclusion of the ING name in its brand identity. All other foreign banks like Citibank, HSBC, & Standard Chartered had to put up with quite a number of restrictions in expanding their operations.

Now, with its first Indian CEO in place, the promoters of ING Vysya Bank must be hoping for a drastic change in the bank’s fortunes. But it is not clear what kind of experience the promoters are expecting from Shailendra Bhandari, who has got exposure to both Citibank and HDFC Bank.

ING, it should be noted, had to approach the Dutch Government to stay afloat, much like Citibank.

ING Vysya’s headline profits for the first quarter were impressive at 42%, but to realize that net interest income grew only by 9% is not comforting.

The bank continues to suffer from worsening gross and net NPA levels.

Due to its origins in an unlikely merger, the bank continues to suffer from a hybrid culture. For example, its workforce is divided 60:40 between an older group under the IBA remuneration norms, and a newer group under CTC terms. Lack of pensions is also a grievance with a section of the employees.

The bank’s CASA deposits ratio needs improvement, and it is not clear how ING’s retreat into its home markets internationally, would affect the prospects of ING Vysya Bank in India.

Will ING Vysya’s Prospects Improve Anytime Soon?

Andhra Bank Facing Unique Problems?

Beneath Andhra Bank’s healthy numbers lie some challenges that are unique to this Hyderabad headquartered public sector bank led by veteran banker RS Reddy.

For the first quarter of FY 09-10, Andhra Bank came up with reasonable numbers. Though the 230% rise in net profit was largely driven by treasury income that is highly unlikely to be repeated, the bank’s net interest income (NII) growth was reasonable at 30%.

However, the bank has a tough road ahead, owing to its exposure to sensitive sectors, SMEs, capital inadequacy, workforce revolt, & Andhra’s unique drought situation.

Andhra Bank has one of the largest exposures – at 42.14% - to retail lending that falls under the sensitive sector. Even while a major retail player like ICICI Bank scaled back their retail lending quickly, Andhra Bank’s ratio of retail lending is even larger than the country’s largest bank, SBI.

Similarly, Andhra Bank has a huge exposure to SMEs, a segment that is said to take maximum time to recover in India. The bank was also in news recently for admitting that a section of its educational loans without collaterals are overdue, with possible slippages into the NPA segment.

Andhra Bank seems to be fed up with lending to PSUs, with Chairman RS Reddy opining that such lending is not viable for the bank. But Andhra Bank itself being a PSB that enjoys all government and public support, such a stand will be heavily criticized. Andhra Bank had recently lost around Rs. 2 crore in the Rs. 5.5 crore cheque forgery case involving the PSU, State Finance Corporation.

Andhra Bank has recently approached Government of India for recapitalization, so as to have a capital adequacy ratio (CAR) of 12%. The bank has asked for Rs. 1150 crore, even while peers like Allahabad Bank, Canara Bank, & Bank of India has indicated that they don’t suffer from the same issue.

Andhra Bank’s all 1500 branches were paralyzed for a day recently when its managers went for a strike alleging ill-treatment. The strike was stunning on two counts. Firstly, it was led by the bank’s senior managers, and secondly, another nationwide strike by officers of all banks had just preceded this strike, signalling that there are issues unique to Andhra Bank. The ill-treatment and overwork alleged by senior managers are said to be an outcome of avoiding fresh recruitments for long.

RBI has registered cases against some Andhra Bank managers for submitting fake currency notes, making the bank one of the five banks to have such cases registered against it.

There are also chances that the drought situation in Andhra – that CMD Reddy has termed unprecedented – may weaken the prospects of this mainly Andhra based bank.

Andhra Bank Facing Unique Problems?

Why Syndicate Bank Looks Promising

With most growth figures including Net Interest Income (NII) up, and most problem figures including high-cost deposits down in the first quarter, Syndicate Bank is refocusing its efforts on the remaining challenges like its Non Performing Assets (NPAs) and its Net Interest Margin (NIM). Beyond the conventional measures, the bank is kick-starting further growth with its single-window ‘Synd Yuva’ campaign as well as the upcoming mobile banking / mobile commerce facility across 2000 branches. The bank will also be a major beneficiary of this fiscal’s farm loan compensation. Syndicate Bank has a new Chairman in Basant Seth, a veteran banker from Bank of India (BoI), whose last assignment was as Deputy MD of SIDBI.

The results for the quarter ended June 30 was one that made India’s banks as well as financial markets nervous. Have the growth figures gone up? Have the loss figures gone down?

As the results for the country’s public sector banks poured in one after the other in recent weeks, two things were clear – first looks were good for all, while second looks exposed the chinks in their armor.

Karnataka based Syndicate Bank was, however, an exception. Of course, they too suffered from the too-good-first-look phenomenon – net profits were trebled to 261.56 crore – but they had good constituent numbers to report.

The extremely good first-look of a 198% increase in net profit was driven mainly by a ten-fold increase in treasury income over the past year’s same quarter. But the real excitement was from core constituent figures with net interest income growing by 16%, global deposits moving up by 27%, global advances by 30%, and credit-deposit ratio moving up by 1.84%.

The only good figure that moved backwards was Syndicate Bank’s net interest margin that moved down from 2.34% to 2.23%.

But the bank has reasons to cheer as even while most growth figures advanced, it could cut some key problem figures. The bank shed high-cost deposits by 44%, and the gross NPA levels declined by 93 percentage points to 1.91%.

Under the leadership of its Executive Directors VK Nagar and R Ramachandran, the bank is aware of treasury income’s help this time, and has embarked on bettering the financial performance with a slew of recent measures like mobile banking and faster single-window customer signup.

Headquartered at Manipal once, Syndicate Bank moved its corporate office to Bangalore some years back, reflecting its ambition to establish itself as a leading public sector bank in the country. But respecting traditions, the bank still holds its Annual General Meetings (AGMs) at the smaller town of Manipal, often called the cradle of Indian banking.

Syndicate Bank will shortly receive the remaining two-thirds from the Government’s net farm loan waiver to banks.

Keen to shed off the lethargic image associated with India’s public sector banks, Syndicate Bank recently launched the ‘Synd Yuva’ campaign. A unique scheme that will challenge even new generation banks in its rapid and single window service, Synd Yuva will provide a customer with instant ATM card, Internet banking account, SMS banking facility, and credit card application.

Syndicate Bank’s Executive Directors VK Nagar and R Ramachandran assumed office in late 2008. While Nagar is a Punjab National Bank veteran, Ramachandran has a similar experience with Indian Bank. Both have undergone training in several niche banking areas in reputed financial institutes in India and abroad.

On the NPA front, Syndicate Bank has moved decisively to strengthen its in-house infrastructure for loan recoveries.

Syndicate Bank traces its history to 1925, when Dr. TMA Pai, together with two socially sensitive friends, Upendra Ananth Pai, a businessman, and Vaman Kudva, an engineer, started a small bank in Udupi with a capital of just Rs. 8000. Their objective was to extend financial assistance to local weavers who were then crippled by a crisis in the handloom industry.

By 1928, Dr. Pai came up with the idea of mobilising funds for these weavers from encouraging the habit of thrift & small savings from among the local community. This tiny Udupi bank would send their agents to collect daily deposits as low as 2 annas from each doorstep. In this way Dr. Pai’s bank got the funds to finance the weavers, and the daily depositors started saving – many of them for the first time in their lives.

Dr. Pai named his innovation as Pigmy Deposit Scheme, and this is the same name, this bank which we now know as Syndicate Bank, uses to this day. The only difference is that Syndicate Bank nowadays collects through 3700 Pigmy Agents, from 12.32 lakh depositors, a total daily sum of over Rs. 2 crores.

Interestingly, Syndicate Bank still collects a daily amount as low as Rs. 1, but the current Pigmy Deposits of the Bank runs to thousands of crores.

Why Syndicate Bank Looks Promising

United Bank of India’s Make-or-Break Year

2009-10 will go down in United Bank of India’s history as the year that this Kolkata-based bank finally made it big. Or, the year in which it slipped further.

FY 09-10 will be a tumultuous year for United Bank of India, that poses challenges like recapitalization, capital restructuring, NPA management, and their initial public offer (IPO).

At 1.7%, United Bank of India has one of the highest gross non performing assets (NPA) among all PSBs, and United Bank’s recapitalization is a complicated process that involves capital restructuring too to make the bank look better in the IPO market. However, the last public sector banking IPO of 2008-09 was a disaster and so was the first public sector unit IPO of this year.

United Bank of India has also come under fire for the pathetic performance of one of its sponsored regional rural banks (RRB) – Manipur Rural Bank – which has the worst gross NPA at 40.35%.

It remains to be seen whether there will be takers to Chairman & Managing Director SC Gupta’s promise to double the business within the next three years.

United Bank of India’s Make-or-Break Year

Canara Bank Net Profit Declines QoQ

Is there anything hiding behind Canara Bank’s 352.7% YoY rise in net profit?

Unlike some of its peers, it is not just stupendous treasury income, or the corresponding last quarter’s poor performance. The sequential or QoQ growth has been, in fact, a de-growth of 22.7% at Canara Bank.

Though suffering from an exposure to the troubled carrier Air India, Canara Bank continues to be approached by the likes of Tata to help with their JLR blunder in UK.

Canara Bank’s recent changes in their home loan procedures have attracted flak for making customers run from pillar-to-post - architect-to-evaluator-to-contractor - multiple times.

Canara Bank Net Profit Declines QoQ

Export Import Bank (Exim Bank) at Crossroads?

What do Ex-Im Bank of USA, China Exim Bank, Korea EximBank, Exim Bank Malaysia, and Exim Bank of India have in common? With its homegrown Chairman & Managing Director TC Venkat Subramanian facing retirement after a long stint, and its chief promoter, Government of India (GoI), looking at somebody from outside to replace him, Export-Import Bank of India appears to be truly at crossroads.

The Export Import Bank of India was created for two core objectives – one, to finance the country’s exporters and importers; and two, to finance those financial institutions aspiring to finance exporters and importers.

But somewhere down the line, Exim Bank got into unconnected businesses like film, SME, and agricultural financing.

Exim Bank of India got into film financing through the related domain of cash-flow financing for film distribution in overseas markets, but it soon led Exim Bank to produce films too. The bank has financed successes like Kabul Express, Dhoom, Dhoom-2, Fanaa, Veer Zaara, The Rising etc, but with the stakes getting higher and higher with each production, risk might be just round the corner.

For example, Exim Bank is financing the Rs. 70 crore Priyadarshan movie ‘De Dhana Dhan’ starring Akshay Kumar, Katrina Kaif, Suniel Shetty, and Paresh Rawal.

Exim Bank of India’s diversifications into small and medium enterprises (SME) and agricultural finance, however, don’t carry even the synergies found in film financing, that is, except when it is for export assistance to these sectors.

Exim Bank is facing difficult prospects in its core business as overseas investments by Indian companies have witnessed a decline of nearly 15% during 2008-09. If this trend continues, Exim Bank of India stands to face a tough 2009-10 in its core areas like export credits, EOU finance, overseas investment finance, lines of credit, & export services.

Exim Bank of India’s Chairman & Managing Director TC Venkat Subramanian had recently cited the gloomy economic situation making the availability of export trade finance a major problem. It is not known how the bank plans to address this.

Exim Bank was recently pulled up by Reserve Bank of India (RBI) for lacking better compliance to its guidelines regarding loan syndication in multiple banking arrangements, as it had the potential for allowing major fraud.

Exim Bank of India was originally hived off from RBI in 1982 as a separate bank for Export-Import, under the Export-Import Bank of India Act 1981. It was modeled around the Ex-Im Bank of USA, China Exim Bank, Afrexim Bank, Korea EximBank, Exim Bank Malaysia, Exim Thailand, EximBank Vietnam, and several others, with similar objective - expanding nation's overseas trade.

Exim Bank is now considering the funding of a major Jatropha plantation project in Ethiopia by Emami Group of India. Queries by Seasonal Magazine regarding the risks of this move, considering the risk-profile of this African country as well as the plant, remain unanswered from Exim Bank of India at the time of publication.

It is possible that with the current Chairman’s exit – who was native to Exim Bank - the Government is planning a return to the original objectives at Exim Bank of India, with an outsider at the helm. TC Venkat Subramanian was with Export-Import Bank of India ever since its inception and was heading the bank since 2001.

Export Import Bank (Exim Bank) at Crossroads?

Has Union Bank’s ICICI-Like Strategies Worked?

Union Bank of India’s campaign ‘Your Dreams Are Not Your Alone’ was perhaps the most catchy bank promotion in recent times. However, it was not the only strategy Union Bank – led by veteran banker MV Nair - copied from India’s private sector banks like ICICI Bank, HDFC Bank, & Axis Bank. But has it really worked for this Mumbai headquartered public sector bank (PSB)?

ICICI Bank, Indian banking's leader in promotional campaigns, has cut their advertisement expenditure by one-third ever since the downturn began. But it was also a time when a few public sector banks, notably State Bank of India (SBI) and Union Bank of India (UBI) hiked their advertisement spending. Union Bank’s was the sharpest increase in ad spend, going up by almost thrice over the previous year.

Union Bank of India also seems to be following some of the strategies that ICICI Bank pursued during the last boom and later discarded – like growing their Point of Sale (POS) business astronomically and providing retail / vehicle loans to non-customers.

On the recruitment front, Union Bank recruited 2200 employees during last year, and this year plans to take in around 2000 – much like how private banks like ICICI Bank, HDFC Bank, and Axis Bank were doing. But with no performance-linked pay structure in place like these private banks, and the retirement-to-recruitment ratio being 3:1, the need for such a move is difficult to rationalize.

The complex effects of Union Bank of India’s promotional campaign – that amounted to Rs. 142 crore in 2008-09 - are now unraveling with the latest quarterly results. On first look, the headline profit growth of 94% shows that the campaign has clicked. Even some constituent figures like the substantial growth in fixed deposits may be an outcome of this aggressive campaign.

However, on a closer look, many other constituent figures are troubling. The fact that Union Bank could post only a 1.52% growth in net interest income shows that something went wrong in their core business of deposits and advances. On the other hand, the most promising component in the results – doubling of non-interest income including treasury – had nothing to gain from the promotional campaigns.

Even the rise in fixed deposits might have complex aftereffects. Union Bank of India’s cost of deposits has increased to 6.47% due to this major focus on fixed deposits. At the same time, the bank’s Net Interest Margin (NIM) is down to 2.29% from 2.92% last year, with pressure coming from these high-cost fixed deposits that will take time to mature. Now, the bank faces an uphill task in raising NIM to a healthy 3%.

At the same time, despite this heavy promotional campaign, the bank could not perform well on the low-cost current account / savings account (CASA) deposits, and now Union Bank has to struggle to bring CASA to 35%, something which might take until 2012.

The bank which has always performed well on the NPA front, however, saw net non performing assets (NPA) going up by 0.57% during last quarter. But this might have to do with Reserve Bank of India (RBI) rejecting a proposal from Union Bank of India to deduct floating provisions from gross NPA. The reason for the RBI rejection is not clear, as similar proposals from peers like Punjab National Bank (PNB), Bank of Baroda (BoB), and Central Bank of India were allowed.

Post-budget, the outlook for treasury gains is bleak for all banks. This is said to be especially so in the case of Union Bank where loan growth is relatively low and treasury portfolio is high. With treasury income being their mainstay during the last quarter, the bank needs to think of other sources for showing profit.

With parking surplus funds in liquid and liquid-plus mutual funds (MF) not going to be viable after around August 2009, Union Bank will be forced to increase lending, but in the face of lackluster demand. MFs was one area where Union Bank of India could register good profits.

Even while bigger players like SBI decided to keep off, Union Bank participated in the consortium funding Air India / NACIL. Now with Air India in deep trouble, the decision seems badly made.

After a good performance in the bourses for some time, Union Bank of India has now started appearing with ‘SELL’ recommendations due to poor short-term prospects.

Like many other public sector banks (PSBs), Union Bank too might have surprises from their restructured loan book in the coming quarters.

Maybe Union Bank of India needs to learn more lessons from ICICI Bank which has discarded brand promotions and is now resorting to Customer Education type of promotions. Also, there seems to be no point in Union Bank adopting aggressive business policies discarded by private sector banks.

Has Union Bank’s ICICI-Like Strategies Worked?

Can Vijaya Bank Build Upon the Turnaround?

Vijaya Bank has recently proven that it could sustain the turnaround that started in 2008-09. Further success down the year, however, will depend upon how Vijaya Bank addresses major challenges like managing non performing assets (NPA), bettering NRI remittances, coping with lower treasury gains, and rapid expansion of alternate delivery channels (ADC). Seasonal Magazine finds out Vijaya Bank’s strategies from interactions with Chairman & Managing Director Albert Tauro and Executive Director SC Kalia.

The turnaround that started from the second quarter of last fiscal now seems complete at Bangalore headquartered Vijaya Bank.

Waging formidable battles on both the yield-on-advances front and the cost-of-deposits front – that too in difficult years like FY’09 and FY’10 – Vijaya Bank has come up trumps on the crucial figure of Net Interest Income (NII) in Q1.

Though Vijaya Bank’s performance on the non performing assets (NPA) front leaves room for improvement, the bank finds solace in the fact that it is not a mass issue but an issue with a few large accounts like the sick public sector unit (PSU) Spices Trading Corporation Ltd (STCL).

For managing NPAs, both recovery efforts and monitoring of restructured accounts to prevent fresh slippages have been undertaken.

The bank is betting big on their substantial presence in NRI hotspots like Mangalore, Hyderabad, Kochi, & Chandigarh to achieve a four-fold rise in NRI deposits to Rs. 5000 crore.

Vijaya Bank’s Chairman Albert Tauro and Executive Director SC Kalia realizes that treasury gains won’t be good next time, but believes that their better credit deposit ratio would help reduce the impact.

The bank is also pinning much hope on expanding their alternative delivery channels (ADCs) to achieve this fiscal’s growth target of Rs. 1.1 lakh crore. Vijaya Bank has already implemented 100% Core Banking Solution (CBS).

To manage their network expansion of around 100 new branches, and scheduled retirements, Vijaya Bank is recruiting 1000 new staff this year. This year’s branch expansion will focus on North, West, & Central India, as against its conventional footprint of South India.

Seasonal Magazine interviews Chairman Albert Tauro and Executive Director SC Kalia:

With the June 30 results out, Vijaya Bank has made a dramatic turnaround to profitability on a year on year basis – from a 76.64 crore loss to a 143.38 crore profit. Are the quarter-on-quarter results equally promising?

The results are certainly promising and make us feel upbeat about the coming quarters. Let me also make it clear that the turnaround started from the second quarter of last fiscal and we moved consistently and progressively thereafter till the last quarter. On stand alone basis, growth in Vijaya Bank’s core earnings every quarter has been one of the highest among public sector banks (PSBs). Our Net Interest Income (NII) for Q4 of last fiscal clocked a 62% growth, followed by a 54% growth in the June quarter this year. Concomitantly, our earning efficiency also improved progressively from 2.07% in the second quarter of last year to 2.38% for the June quarter. I am sure, with likely pick up in quality and stable business, the current and subsequent quarters show a lot of promise.

Unlike many bigger PSBs, Vijaya Bank has managed a 53.75% growth in Net Interest Income (NII). What were its key drivers? Is it sustainable in the coming quarters?

The key drivers of our NII growth is better yield from our advances portfolio and to some extent, interest cost containment. Vijaya Bank’s yield on advances, at 10.72%, is quite comparable to the best in business while on the cost front, we have managed to bring down cost of deposits to 6.82%. Managing cost of deposit was quite a challenge, I must say, especially in view of the volumes contracted during the second half of 2007-08, a common feature of the banking industry then. For us, it is possible to sustain the NII growth in the coming quarters. Our focus on current account / savings account (CASA) deposits, broad based advances, and quality loan assets is likely see us maintain the growth in core earnings.

You have embarked Vijaya Bank upon a campaign to increase your NRI deposits four-fold within the next couple of years. Apart from starting overseas branches, how do you plan to achieve the target of Rs.5000 Crore?

Campaign "Mission NRI – 5000" aims to increase our non-resident deposit base to Rs.5000 Crore by the end of this fiscal. Vijaya Bank has got good presence in high potential centres like Kochi, Mangalore, Chandigarh and Hyderabad and we are confident of realizing this goal. As brought out by a recent report, India receives the highest inward remittance in the world and with the global market sentiments slated for improvement from the second half of the current financial, we should further this goal with even greater vigour. We don’t have any overseas branch as yet, which we make good with the aid of tie-ups with our correspondent banks. We are also in the process of tying up with leading Exchange Houses in the Middle East to step up our non-resident deposit growth.

Vijaya Bank continues to suffer on the non performing assets (NPA) front, with a increase from 1.71% to 2.94%. With NPAs coming in all the crore lending sectors like commercial real estate, personal loans etc, how do you plan to combat it in the coming quarters?

NPAs are not an exception to Vijaya Bank alone, more particularly if you consider the last few quarters marked by recessionary pressures. About the June quarter as well, almost all the banks have seen rise in the NPA level that was on expected lines. Let me also add that in our case, the addition has been on account of very few large accounts and we are making all efforts to turn those around. Otherwise, our NPA level in sectors like agriculture, education loans etc are quite reasonable and manageable. We have an action plan in place to improve our asset quality. In the first place, we are targeting our restructured loan books and keeping a close vigil so as to prevent fresh slippages. Our loan appraisal and monitoring systems have also been strengthened further to contain the accretion to the bare minimum. Finally, our recovery efforts are being reinvigorated in the form of more V-Adalats, Baaki Vasuli Camps and recourse to various legal provisions.

Vijaya Bank’s STCL account is particularly troubling. How do you plan to solve the issue?

I would not like to comment on any individual account for obvious reasons.

Do you foresee treasury gains slowing for Vijaya Bank in the coming quarters, due to India's mounting fiscal deficit and your low credit deposit ratio?

First of all credit deposit ratio exceeding 67% probably does not merit to be termed as low as against the industry average of about 70%. What is more heartening is the fact that despite relatively low growth in advances, Vijaya Bank could notch up 54% growth in Net Interest Income and 69 bps rise in our Net Interest Margin (NIM) quarter on quarter. That way, our core earnings significantly augmented our treasury income and as such, we are confident of sustaining our overall earnings. Treasury gains in the coming quarters may not be as buoyant as they were in the last quarter. This is applicable to the entire banking industry, given the current trend, likely inflationary pressures and recovery in credit demand and the Government's borrowing plan. Benchmark yields are likely to undergo some hardening, especially from the latter part of the second half. We must also appreciate that the Reserve Bank of India (RBI) may withdraw its accommodative stance once the revival takes effect. In such a scenario, treasury gains may feature slackness in the coming quarters.

From the current business levels of Rs.92000 Crore you plan to move Vijaya Bank up to Rs.1,10,000 Crore by fiscal end. What role will alternate delivery channels like IT play in this growth?

IT Enabled Alternative Delivery Channels (ADCs) will be one of the key drivers in our business growth. Vijaya Bank is already 100% CBS and we have the wherewithal to draw new tech savvy clientele and augment our top line. We offer today any-branch banking as well as remote banking options which are good value propositions for customers who prefer to conserve time and energy by not going for physical branch banking. We have internet banking modules for both corporate and retail segments, offering SMS enabled facilities, bill payment, tax remittance and so on. We are very soon launching Mobile Banking and Phone Banking as also an e-enabled Trading Portal aimed at our niche segments. We have plans to increase our ATM network to 500 by this fiscal and at the moment, our ATM hits are quite encouraging though there is still a lot of upside to it. Besides, ADCs are going to be our competitive advantage as far as our NRI customers and High Net-worth Individuals (HNI) are concerned. Lastly, Vijaya Bank is all set to launch an Online Loan Processing System that will help us improve our advances volume further.

Can Vijaya Bank Build Upon the Turnaround?

Can PNB Take on ICICI Bank, SBI?

Punjab National Bank, India’s second-largest public sector lender, is trying to overcome remaining challenges like a significant restructured loan book and still-to-be-perfected operational efficiencies, to take State Bank of India (SBI) and ICICI Bank head on. PNB already has the largest ATM network and the second-largest branch network among all public sector banks (PSBs).

India’s ongoing tussle in the banking sector – the fatherly advice of RBI to lower rates, and the free-thinking defiance of public sector banks – doesn’t affect one player much, because, at 11%, Punjab National Bank (PNB) already has the lowest prime lending rate (PLR) among all banks in the country.

It goes without saying that it is a feature that makes PNB a favoured bank among India’s businesses, farmers, and consumers.

Punjab National Bank also excels on Capital Adequacy Ratio (CAR) – perhaps the only parameter where many Indian banks fall short, much like their global counterparts. While many Indian Banks are struggling to keep their heads above the floor-levels of 9-12%, PNB’s CAR is at a very comfortable 14%, a distinction that it shares with only one other PSB. This also makes PNB in no need for recapitalization by the government, something that is plaguing many other peers.

New Delhi headquartered PNB, India’s second-largest public sector lender, has over the years acquired some unique strengths vis-à-vis its peers, which can make this public sector bank take on bigger players from both the public and private sector, provided it can manage some key challenges.

The bank produced a Dalal Street beating Q1 financial performance which was noted not only for its headline profit growth of 62% aided by a sharp rise in treasury income, but for its several constituent and other key figures. Loans were up by 38%, total income was up by 34%, operating profit was up by 59.7%, but the biggest surprise came by way of interest income which was up by 26%.

The performance on the net interest income (NII) front is especially good, taking into account their low PLR and how other comparable banks have performed. It also enabled PNB to manage margin pressures better.

The bank has a good source of low-cost funds in its CASA deposits that amount to nearly 40% of its total portfolio.

Punjab National Bank which lost its last Chairman KC Chakraborty recently to Reserve Bank of India (RBI), since he was the senior-most banker in India, is now led by its Executive Directors MV Tanksale and Nagesh Pydah, both veteran bankers from India’s public sector banking.

According to Tanksale, the bank is eyeing a profit of Rs. 3700 crore for the current fiscal, based on an anticipated loan growth of 22% and maintenance of Net Interest Margin (NIM) at 3.5%.

PNB is a good performer on the bourses, with most analysts assigning ‘BUY’ or ‘KEEP’ recommendations, and the scrip commanding a significant premium over spot-price in Foreign Institutional Investor (FII) transfers.

Punjab National Bank had also put in a good performance during 2008-09, which saw net profit going up by nearly 69% over the previous year. And it was a sustained, all-quarter performance, with even the choppy Q4 producing a 59% jump in net profit. Buoyed by the development, PNB was also quick to declare a generous 200% dividend.

2009-10 will be a momentous one for PNB, as it battles some of its core challenges and handles some divestments.

PNB has a huge portfolio of restructured loans, which is the second-largest (as a percentage of its loan-book) in the public sector category. The bank needs to keep a close watch on these accounts lest they fall into the non-performing category next year.

Punjab National Bank also need to improve in its overall business efficiency, as, despite having India’s second largest branch network, it is only third-largest in total business - behind State Bank of India (SBI) and ICICI Bank - when considering both public and private sector banks. A part of this seeming inefficiency is directly due to meeting their social commitments as a public sector bank, something private sector players are not burdened with.

For example PNB’s ratio of priority sector credit to net bank credit is 41.53% as against the national goal of 40%, and its ratio of agricultural credit is 19.72% as against the goal of 18%.

Punjab National Bank is divesting a 26% stake in its wholly owned subsidiary PNB Housing Finance to international major Dawnay Day for an amount estimated to be between Rs. 70 – 80 crore. The sale’s due diligence is going on and PNB expects to wind up the process within two months.

The bank continues to garner international recognition and partnerships, with the latest being Ex-Im Bank of USA recognizing Punjab National Bank for partnership in its $2.45 billion India Infrastructure Facility, a mega loan facility for India’s infrastructure projects.

On the technology front, PNB has not only completed implementation of Core Banking Solutions (CBS) throughout its vast network, but has also completed CBS in all its affiliated Regional Rural Banks (RRBs) – a sector that is normally shy of technology.

With 100% CBS, the largest ATM network among all PSBs, and Internet Banking, Punjab National Bank has implemented truly ‘Anytime Anywhere’ banking. In fact, it goes even beyond to facets of e-commerce like booking of tickets, payment of bills etc.

PNB is an outperformer in socially inclusive banking, and has kick-started several initiatives in sectors like microfinance, self-employment loans, kisan credit cards, rural smart cards, enabling technologies for the handicapped, support for the economically challenged etc.

Punjab National Bank has operations in UK, Norway, Dubai, Singapore, Hong Kong, Shanghai, Afghanistan, Kazakhstan, & Nepal, and is now planning to enter markets like Canada, Australia, Indonesia, Bhutan, & Fiji, as well as strengthen its presence in UK, China, Dubai, & Singapore. In UK alone, PNB plans to pump in $50 million more to multiply its thriving business there.

Can PNB Take on ICICI Bank, SBI?

How Yes Bank Fares Among India’s Private Sector Banks

At just 123 branches, 2000 odd employees, and sub-100 crore quarterly profit levels, Yes Bank is one of India’s smallest banks in all categories taken together – traditional private banks, new generation private banks, and public sector banks (PSBs).

But Yes Bank has made good progress in certain niche areas like corporate lending to the country’s medium to large enterprises, since its start in 2004.

Driven by a massive advertising campaign, Yes Bank projects a profile that is much ahead of many of India’s private sector banks, but size-wise it is smaller than most small private banks of India like Federal Bank, South Indian Bank, ING Vysya Bank, Dhanalakshmi Bank, IndusInd Bank, and even Catholic Syrian Bank.

However, Yes Bank always has the consolation that it is the only Greenfield banking project in India during the past several years.

Has Yes Bank got what it takes to be a key player in India’s private sector banking? Comparing to the first five-year growth trajectories of private-sector successes like ICICI Bank, HDFC Bank, Axis Bank, or Kotak Mahindra Bank, the growth shown by Yes Bank doesn’t come across as promising.

For example, though the profit growth posted for the quarter ending June 30 is not bad at 84% (QoQ), its component figures are troubling. It was mainly driven by a 103% rise in non-interest income, mainly from Yes Bank’s treasury operations. Also, the growth figures are not that impressive on a sequential quarter basis, and some key numbers like deposits have actually gone down over the just preceding quarter. The rise in treasury income is highly unlikely again during this fiscal.

Yes Bank’s newfound strategy titled ‘knowledge-driven banking’ tries to focus on India’s sunrise sectors like food, agribusiness, infrastructure, life-sciences, technology, sustainability, education etc – many of them not enjoying wholehearted support from traditional banks due to the higher risks involved.

But Yes Bank need to tread carefully in these domains as it already has a serious non-performing assets (NPA) problem. During the first quarter of this fiscal, Yes Bank’s gross non-performing assets (NPAs) have made a dangerous jump – nearly three times – and their non-tax provisions have also shot up by over five times, signaling major problems in loan defaults and restructuring.

Promoted by former Rabobank India head Rana Kapoor, one of Yes Bank’s largest shareholders is the Netherlands based Rabobank. A Dutch cooperative bank consortium owned by its customers, Rabobank primarily caters to agriculture and food business. Though known for good management, Rabobank’s Irish unit has been in deep trouble for some time due to almost one-third of its assets turning non-performing, and was in need of a government bailout.

Until now, Yes Bank followed an unconventional strategy of ignoring the business of current account / savings account (CASA) deposits. And until now, Yes Bank had shied away from retail banking, citing high risks. But now, when established retail players like ICICI, HDFC, & Axis are scaling down their retail operations due to proven risks, Yes Bank is pinning much hope on retail lending.

But with one of the tiniest CASA ratios in India – at around 9% - Yes Bank’s plans to source funds for the highly competitive retail lending segment might prove to be difficult. The bank has little access to low-cost CASA deposits, while it’s exposure to high-cost deposits is high.

Yes Bank is known to take risks, a recent example being the participation in the controversial plan to revive Subhiksha. The soundness of this strategy is doubtable as peers like Kotak Mahindra Bank who had earlier funded the troubled retailer has opted out of the consortium and instead filed a winding-up petition in courts against Subhiksha.

Yes Bank was also recently mentioned in Lok Sabha for violation of one or more of five RBI guidelines, together with 12 banks. The exact violation in Yes Bank’s case – whether it was irregularities in Know-Your-Customer (KYC), Initial Public Offer (IPO), Foreign Exchange Management Act (FEMA), Cash Reserve Ratio (CRR), or Statutory Liquidity Ratio (SLR) – is not known. The bank declined to comment on a query on this issue.

How Yes Bank Fares Among India’s Private Sector Banks

ICICI Bank Faces Tough Battles Ahead

For the last 15 years, KV Kamath and his core team’s growth model at ICICI Bank was the model to emulate for all other Indian banks. But 15 years later, nobody – including ICICI - seems to be much enchanted with the model.

In less than 15 years, ICICI Bank became the country’s second-largest in assets, the largest in credit cards, and the largest in international business.

But after the downturn hit, have these achievements become liabilities at ICICI?

Apart from Reserve Bank of India (RBI) control, the main reason why Indian banks escaped unscathed from the global financial crisis was their limited exposure overseas. But at ICICI Bank, their significant overseas exposure continues to hurt, as the global markets are still to recover.

ICICI’s once booming credit card operation’s real edge was offering credit cards to non-customers – something most other banks were wary about, and something that ICICI Bank has drastically reduced now on hindsight wisdom. Similarly, ICICI Bank’s leadership in assets might have been aided by unsecured retail loans.

ICICI continues to suffer an image crisis from a slew of customer complaints, government actions, and court verdicts.

An ICICI Bank officer was recently caught in a Rs. 5 crore cheque forgery case, ICICI’s huge suspense accounts created with unclaimed cheques have drawn Right-To-Information (RTI) submissions, Reserve Bank of India (RBI) has issued warning notes to ICICI Bank twice, Bihar Government has pulled up ICICI for not supporting farmers, students, & entrepreneurs, and ICICI Bank has lost in consumer courts over illegally hiking home loan rates.

ICICI needs to do some serious introspection over why there is such an image crisis and whether there is something intrinsically wrong in their operation. With a home-grown CEO like Chanda Kochhar – a core member of KV Kamath’s original team – now in control, this exercise can be easier than imagined.

Such a move would complement the ICICI website’s warning link on ‘Use of Unparliamentary Language by Customers’ as well as recent litigations like suing HDFC Bank’s HR Head for an unfair dig of referring to the ‘ICICI Culture’ with disdain.

After years of maverick banking, ICICI Bank now seems more like a regular bank. ICICI has shifted loan recovery in-house, have almost stopped unsecured retail loans, have cut down on expenses, and have started attending to smaller corporates through a new vertical for the first time – all of which were standard policies at ICICI Bank’s private and public competitors for long.

From peak growth levels of around 40%, ICICI is now struggling at single digit levels, even while most others are enjoying double-digit growth. Even for the quarter ended June 30 2009, almost all core business figures were down – gross advances by 12%, total deposits by 10%, total income by 2%, and net interest income (NII) by 5%.

At the same time, almost all problem figures were up at ICICI Bank – the ratio of gross non-performing assets (NPAs) increased to 4.63% from 3.72%, while the ratio of net non-performing assets were up to 2.19% from 1.74%.

The only solace for ICICI was that the net profit for the quarter zoomed by 21%, but this performance being driven mainly by treasury profits and extreme cost-cutting – both of which are quite difficult to replicate in the next quarters – the outlook remains bleak.

Being a private bank, ICICI Bank’s lending rates are much above public sector banks (PSBs), but when it comes to Net Interest Margin (NIM), it is just 2.4%, below the healthy 3%.

CRISIL has recently downgraded some of ICICI Bank’s bonds to ‘negative’ from ‘stable’. It reflects poorly on ICICI Bank’s asset quality and core earnings.

There have been speculations that ICICI Bank’s massive loan restructuring has helped to better their NPA numbers. If that is true, there is no doubt it will come back to haunt ICICI soon.

Even after restructuring loans worth Rs. 1400 crore, and significant upgradation of loans, there are analysts who put the impaired loan ratio of ICICI Bank at 8.5 - 9 percent.

Whenever top ICICI Bank officials speak about no-performing assets (NPAs), they speak about provisioning for it. It remains to be seen whether the creation and subsequent management of NPAs is such a simple issue.

ICICI Bank Faces Tough Battles Ahead

Why UCO Bank Hopes 2009-10 to be a Landmark Year

UCO Bank might be facing complex challenges in capital restructuring, margins, and non-performing assets, but its social commitment to ensure financial inclusion for all is worth mentioning. Chairman & Managing Director SK Goel explains to Seasonal Magazine the strategies for maintaining this balancing act at UCO in the coming quarters. With capital restructuring entering its last phase this year, a planned FPO, and new strategies to tackle problem areas like NIM & NPA, FY 09-10 might prove to be a landmark year for UCO Bank.

Kolkata headquartered UCO Bank is one of India’s leaders in banking that meets the country’s complex social commitments. For example, UCO’s advances to the priority sector during 2008-09 constituted more than 50% of its total advances, and this public sector bank (PSB) also met all its lending commitments to the agricultural and weaker sections of the society. UCO Bank is also a two-time national award winner for lending to micro enterprises.

But such socially committed policies come with a price. UCO was one of the first banks to be recapitalized by the Government as soon as the downturn happened, as its Capital Adequacy Ratio (CAR) needed improvement.

UCO Bank’s Chairman & Managing Director SK Goel is a veteran banker of India, but also known for his non-conformist attitude with the industry. Under his leadership, UCO is trying to be more customer-friendly with new-generation features like no-holiday branches and express services.

Chairman Goel is also known to think from customers’ shoes, and his recent advice for existing home loan customers – a disenchanted lot in India as elsewhere – were enough to evoke a smile, if not renew hope. He asked home loan customers burdened with a high interest rate to try bargaining with their banks for a lower rate or move the loan elsewhere that offered better rates. Goel further explained that these were not unfeasible options as no bank would opt to lose a customer in whole, but would prefer lesser profits.

SK Goel’s leadership qualities have influenced UCO Bank positively, and it was with great pride that UCO, the lead banker (head of the State Level Bankers Meet) for Himachal Pradesh, announced that the state has become the country’s first in ensuring 100% credit inclusion for all households.

One of UCO Bank’s main challenges is to better its Net Interest Margin (NIM) that stood at 1.98% in 2008-09 as against the desired level of 2.5 to 3%. The bank is hopeful of moving its NIM to at least 2.25% in 2009-10.

To meet this and other challenges, UCO is focusing more on productive markets like the Indian state of Gujarat. The bank already has a significant presence there, but wants to double it within the next two years.

But in dealing with India’s state governments, UCO Bank has proved more than once that it has a mind of its own. Recently, it turned down a West Bengal government initiative to participate in a bank consortium to deliver Rs. 500 crore to fund land banks for industrial units. UCO cited its inability as due to a policy of not directly funding land acquisitions even if the acquirer is a state government. Considering Bengal’s poor track-record in industrial development, UCO Bank’s decision appears to be safe even otherwise.

To better the financial health of UCO Bank, a major restructuring process has been on for some time now, and is expected to enter its final leg this fiscal. The bank has already been infused with Rs. 450 crore by the Government in 2008-09, and will receive another Rs. 750 crore this year.

UCO recently got a boost when CRISIL upgraded their rating on the bank’s lower tier-2 bonds from AA to AA+, based on continued central government support to the bank.

As part of the ongoing restructuring, UCO Bank needs to raise around Rs. 500 to 600 crore on its own, out of which Rs. 136 crore is expected to come from a Follow-on Public Issue (FPO) late this year. The bank needs to manage the FPO perfectly, as a similar move last year had to be abandoned due to adverse market conditions.

UCO is getting into the general insurance business this year by floating a new company that will have other domestic and foreign entities in this sector. The bank plans to hold a 30% stake in the new entity.

UCO Bank grew its total business by 25% in 2008-09 to reach Rs. 1,69,890 crore, and plans to grow it on similar lines to Rs. 2.02 lakh crore this year on an expected credit growth of 25%. Profitability for the first quarter is already up by 15% over the corresponding quarter last year.

UCO’s footprint in India is significant, both geographically and sector-wise. The 66 year old bank has 2065 branches across the country and lends to all sections of the Indian economy - micro, small, medium & large enterprises, and spanning all sectors including retail, agriculture, services and infrastructure. UCO Bank has presence in Singapore, Hong Kong, China, and Malaysia, and correspondent arrangements all over the world.

UCO Bank’s Non Performing Assets (NPA) level stands above 1% and it is a prime challenge before the bank. Lately, the bank has started showing successes in its NPA battle.

Seasonal Magazine explores Chairman SK Goel’s strategies for meeting UCO Bank’s challenges through an interview:

You had recently remarked that during Non Performing Assets (NPAs) sale, UCO prefers cash over Security Receipts (SRs). Is this viable, considering the poor interest shown by Asset Reconstruction Companies (ARCs)?

Sale of NPAs depends upon the quality of the assets. It is not entirely true that ARCs show poor interest in cash transactions. Where the asset quality is good, UCO Bank does prefer and can demand cash sales over security receipts as SR is a long-term process and offers no certainty of realization. UCO has been quite successful in negotiating good terms with ARCs.

How do you assess the financial health of UCO Bank vis-à-vis its peers? UCO has challenges on both the Net Interest Margin (NIM) front and the Non Performing Assets (NPA) front…

There are challenges, but UCO Bank has made headway on both fronts, lately. Speaking about NPAs, for the first time in recent past, in FY 08-09 UCO’s total recovery from NPAs other than write-offs was higher than fresh accretion of NPAs thereby achieving a reduction in absolute NPA numbers. Our NNPA to Net Advance Ratio which was 1.98% as on 31.3.08 has come down to 1.18% as on 31.3.09. This has been achieved despite difficult economic condition prevailing in India arising out of the global financial meltdown. And UCO Bank continues to employ a two-pronged strategy on NPAs – firstly, better NPA management through recovery from stressed assets, and secondly, prevention of further slippages of assets. On the NIM front too, we are pursuing a dual strategy of putting maximum stress on mobilizing low-cost deposits, even while reducing our cost of funds.

Concerns have recently been raised about PSBs including UCO Bank resorting to mass restructuring of loans to temporarily clear NPAs from the balance sheet. But won’t they come back to haunt you in the next balance sheet? What is your take on this?

Restructuring was a one-time initiative declared by Reserve Bank of India (RBI) in the second half of financial year 2008-09 to counter the spillover effects of the global downturn which affected the otherwise viable industrial units and projects. This enabled banks to maintain credit quality. Most of the restructuring exercises undertaken by UCO Bank were outcomes of RBI guidelines on this matter. As a follow-up measure UCO has also put in place proper monitoring mechanism to keep the restructured accounts under strict vigil and prevent slippages to NPA category.

How will you counter the allegation that public sector banks’ (PSBs) performance is largely driven by government compensating for non-performing agricultural loans, as well as large government funds like the National Rural Employment Guarantee (NREG) switching to PSBs for disbursement, thereby forcing millions of hitherto unbanked to open accounts?

One has to understand that public sector banks in India are instruments of social change for the country apart from being business organizations. PSBs are mandated to undertake priority sector lending of which agriculture lending is a part. The Government’s relief measure to farmers by way of ADWDRS is a welcome relief to farmers who have been struggling to repay their loans for various reasons. For UCO Bank the proportion of NPAs out of the eligible amount is relatively small. Regarding the second part of your question, it is a universally accepted fact that financial inclusion is a pre-requisite for upliftment of the poor and the marginalized. Taking banking to the unbanked is a part of that process and disbursement of funds under NREG scheme through banks is meant to ensure proper delivery and prevention of leakages.

UCO Bank was one of the first banks to be recapitalized by the Government as soon as the downturn happened, and reportedly needs another round of fund infusion shortly. How did your Capital Adequacy Ratio (CAR) come to be lower than some of your peers?

During FY’08-09, UCO Bank continued to remain BASEL-II compliant with Capital Adequacy Ratio (CAR) at 11.93 per cent as on 31.3.2009. It is relevant to observe that UCO is Basel II compliant as we have international presence. RBI has also concurred with us that only Basel II CAR is applicable for UCO Bank from 31.3.08. There has been a change in the overall capital structure of UCO during the financial year 2008-09. UCO Bank has during the year restructured its capital as per the Capital Restructuring Plan approved by the Government of India. In accordance with the plan, a sum of Rs. 250 crore out of the total equity capital of Rs. 799.36 crore has been converted into Perpetual Non-Cumulative Preferences Shares (PNCPS), thereby reducing the total equity share capital of UCO to Rs. 549.36 crore and resulting in the consequential reduction in the percentage shares held by the GOI from 74.98 per cent to 63.59 per cent. As per this plan, Government of India would be subscribing a sum of Rs. 1200 crore in innovative capital instruments of UCO Bank , in two tranches of Rs. 450 crore and Rs. 750 crore during the years 2008-09 and 2009-10 respectively, to strengthen the capital base of the bank. UCO has already received Rs. 450 crore during March 2009 and has accordingly allotted PNCPS to the GOI.

Why UCO Bank Hopes 2009-10 to be a Landmark Year

Central Bank of India Plots Turnaround

Central Bank of India has been hit somewhat by the economic downturn, but the bank which is noted for its customer-friendliness and social commitment, is banking on these very factors to survive and thrive in 2009-10. Seasonal Magazine gets answers on Central Bank’s challenges from Chairman & Managing Director S Sridhar.

Though annual growth in profits has moderated to just 3.8%, Central Bank of India continued to put up impressive growth in total business, above 18%, in 2008-09. This growth is not bad considering the little room that exists for growth – at nearly 3500 branches and 2.5 crore customers, Central Bank is already a banking behemoth.

Due to the downturn, there was also a significant drop – more than 50% - in standalone net profit for the last quarter.

But Central Bank of India hopes to reverse all these with its customer-centric policies, mass banking initiatives, and RBI support.

Central Bank’s top management comprises of its Chairman S Sridhar, and Executive Directors Ramnath Pradeep and Arun Kaul. CMD S Sridhar was earlier the Chairman of National Housing Bank, and has chalked out an ambitious plan to double Central Bank of India’s customer base to 5 crores.

Recent customer-centric new initiatives from Central Bank include Cent Kisan Gold Card for farmers, bringing in private equity (PE) power into sick units, an SMS alert facility for savings and fixed deposit account holders, a subsidised home loan scheme for the urban poor, and a proactive involvement in public policy formulation by its Chairman S Sridhar.

The Cent Kisan Gold Card from Central Bank of India (CBI) provides a credit limit up to Rs. 10 lakhs against land for a five year term at interests that start from as low as 7%. Farmers can avail this for both farming and no-farming activities.

Central Bank is planning an innovative route to tackle underperforming loans in the commercial sector – by bringing in Private Equity (PE) funds with investment and management skills into these units.

The SMS alert facility is available for all Central Bank savings account holders for transactions of Rs. 5000 or more, as well as all fixed deposit customers, and will be available across the 1200 Core Banking Services (CBS) branches of CBI.

After a lull in recruitment for several years, Central Bank of India is now active on the recruitment front to drive growth as well as to bring down the average employee age. The new recruits will join a nearly 40,000 workforce, a quarter of which comprises MBAs, CAs, & LLBs.

Central Bank has always been noted for its social commitment, and the new initiatives also reflect this. It has tied up with Ahmedabad Municipal Corporation for development of low-cost housing units, for which Rs. 120 crores has been sanctioned towards loans at subsidized interest rates.

In tune with the Government’s vision of making banking more accessible to minorities, Central Bank of India has opened 40 new branches in minority concentration districts of the country, and has come up with top honours in this regard – second only to State Bank of India (SBI).

Chairman of Central Bank, S Sridhar is known for his proactive participation in forming public policy, and his recent cautionary remarks on the move by a section of the real estate industry to hike prices, gathered popular support. Sridhar termed the move short-sighted and explained that the time was ripe for a recovery only if the real estate prices adjusted a bit more downwards or at least stabilized.

The Mumbai headquartered Central Bank of India’s loan portfolio has a significant 18% exposure to agricultural loans, ahead of many of its peers. However, there is risk too from this kind of farming-friendly policies. Banks have been forced to waive farm loans, but so far they have been compensated for only 32% of the waivers; for the remaining, it will be a long wait of another two years.

It is not only in agricultural loans, that the bank shows its customer friendliness. Even in a difficult year like 2008-09, Central Bank was ranked as the ‘Best Education Loan Provider’ and the ‘Second Best Home Loan Provider’.

Central Bank of India was also quick to offer home loans at a fixed rate of 8% to tide over the current crisis in the real estate market.

Central Bank is also aiding India’s state governments to kick-start growth – the best recent example being the Rs. 11,000 crore corpus fund that has been readied to assist Madhya Pradesh’s Trade and Investment Facilitation Corporation (TRIFAC).

Despite Central Bank of India’s stock not coming up with an impressive performance in the stock market, the bank is mulling a right issue or a follow-on public issue this year to raise capital.

Central Bank’s recent move to sell off Rs. 102 crore worth of Non Performing Assets (NPAs) will largely be from their corporate loan book. Unlike many other banks, CBI is still hopeful of Asset Reconstruction Companies (ARC) to manage their NPAs.

The financial health of Central Bank of India needs improvement as it is challenged on both the Net Interest Margin (NIM) front and the NPA front, when comparing with RBI guidelines.

Serious concerns have recently been raised about public sector banks (PSBs) resorting to mass restructuring of loans - in response to an RBI directive – but which might have temporarily cleared NPAs from their balance sheets. A small percentage of restructured Central Bank loans might also fall in this category.

This year, Central Bank of India plans to scale up their retail loan book from 9% to 15%, and their Medium & Small Scale Enterprises (MSME) loan book from 8% to 10%. With an already fat farm loan book of 18%, these are clear indications that Central Bank of India is not only looking at the big corporates for growth.

Central Bank of India Plots Turnaround