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

Will Indian Overseas Bank Get Stronger Soon?

Indian Overseas Bank had a difficult 2008-09, which it doesn’t want to repeat this fiscal. Major measures are now on to tap lucrative overseas markets like Malaysia, focus further on its creative business of film-financing, toughen its battle on the NPA/NIM fronts, and solidify its reputation of reliability with a 3-Way Disaster Recovery facility. Seasonal Magazine gets inside IOB through an interview with Chairman SA Bhat.

Indian Overseas Bank, the Chennai headquartered public sector banking major is now just 50 short of 2000 branches, with a business mix of 1.75 lakh crore. Under Chairman & Managing Director, SA Bhat, IOB is taking the challenging year of 2009-10 head on, with a lot of innovative measures.

Combining its might with fellow banks, Bank of Baroda (BoB) and Andhra Bank, Indian Overseas Bank is starting a new banking subsidiary in Malaysia this year. It is also applying consortium-finance together with Exim Bank to fund a mega movie – the Rs. 70 crore ‘De Dhana Dhan’ starring Akshay Kumar and Katrina Kaif, and directed by Priyadarshan. Earlier IOB had financed the Rajanikant starrer ‘Sivaji’ which went on to become the highest grossing Tamil film ever in history.

When banks collapsed one after the other in US, the government there had turned to some of the most reliable banks like JP Morgan Chase and Bank of America to save them by mergers. A similar situation had arisen with Pune-based Shree Suvarna Sahakari Bank (SSSB) three years back, and it was Indian Overseas Bank that Government of India chose to take over SSSB. On 20th May 2009, IOB wound up the protracted steps of takeover, and the SSSB branches became Indian Overseas Bank branches. Everyone in the banking industry expected customers of SSSB to rush to IOB on day one to claim their deposits which had been frozen for three years. But it was the reverse that happened. The SSSB branches of Indian Overseas Bank attracted new deposits worth Rs. 6 crore, 1000 new accounts, and renewal of 10,000 fixed deposits, all in just the first five days of operation.

Indian Overseas Bank, though a moderate performer in the stock market, has garnered recent attention with LIC buying nearly 50 crore worth of IOB shares. Chairman SA Bhat has been a Bank of India (BoI) veteran, before moving on to UCO Bank as its Executive Director, before taking over IOB’s reins in June 2007.

Seasonal Magazine quizzes SA Bhat on Indian Overseas Bank’s challenges and strategies:

What prompted Indian Overseas Bank to go for a new banking subsidiary in Malaysia this year? And why is it a joint effort with two other banks?

Overseas expansion is expected to be a major growth avenue for Indian banks this year. Malaysia was a natural fit as the country has a significant ethnic population of South Indian origin. Indian Overseas Bank being headquartered in Chennai, has a natural flair to address these customers of South Indian origin in Malaysia. We already have a smaller presence there, the feedback from which was promising. Coming to the second part of your question, the main reason for a joint effort with Bank of Baroda and Andhra Bank was as a means to manage the high costs of setting up a bank there. This way, each of us can bear the required capital load better.

IOB has always been a moderate performer in the stock market. With LIC recently taking up Indian Overseas Bank shares worth Rs. 50 crore, do you expect a better positioning?

I wouldn’t agree that IOB was always a moderate performer. But, yes, the scrip encountered some problems when a foreign institutional investor (FII) offloaded his 10% stake in the bank. Now, that is what we call a huge volume sale, and it reflected in the scrip’s further performance for some months. But soon other investors realized that that sale was a one-off case, and that the IOB stock is basically strong. As of LIC taking a significant stake, I would say that it has been good for them as they could buy IOB cheap, and now it is soaring.

Indian Overseas Bank is now applying consortium-finance together with Exim Bank to fund a mega movie – the Rs. 70 crore ‘De Dhana Dhan’. Isn’t it a risky proposition?

Financing movies are not something new to Indian Overseas Bank, as you might know. Our movie finance portfolio includes Tamil hits like ‘Sivaji’. But our exposure to Bollywood has been rather limited. However, we are confident on this front as there is a due diligence that is followed in selecting the right project. An IOB panel examines aspects like the producer’s and director’s track record, who all are starring in it, and other factors. For example, ‘De Dhana Dhan’ is by Priyadarshan and stars Akshay Kumar and Katrina Kaif, which shows it is an ambitious project. And even if a movie doesn’t do as well as expected, the bank is covered by way of primary security and collateral security. The primary security is the rights (prints) of the movie, and collateral is something unrelated like property etc. I think that film financing is just another arm of conventional financing that can be highly prospective if done correctly. It is just a case of matching the risks and rewards. See the case of ‘Sivaji’ that Indian Overseas Bank financed. This Rajanikant starrer went on to become the highest grossing Tamil film ever.

By registering just 10% growth rate in fiscal 2008-09, IOB has become one of the slowest growing banks in India. How do you plan to overcome this challenge?

When you say 10% growth rate, please remember that it is only in profits. Because, Indian Overseas Bank’s overall growth rate was much higher, much in tune with the industry. On the profit front, yes, we were hit due to the economic downturn, NPAs, and other factors. We need to work more on our margins. But overall we are confident. We play the game systematically. IOB won’t be like some aggressive banks who grow at 40% one year, and struggle with 0% growth the next. We prefer to grow with the industry.

On the loan front, is Indian Overseas Bank battling low demand for high-quality loans? Recently, you had opted to part-finance the beleaguered Jet Airways to the tune of hundreds of crores. Not many banks were willing for the risk…

I don’t agree that IOB is facing a dearth of high-quality loans. Due to the economic downturn, maybe, many conventionally good loans have turned riskier. And I don’t agree that many banks were unwilling to take risk with Jet Airways. In fact, Indian Overseas Bank is not going on this alone – a consortium is funding Jet. I agree that the element of risk is there. The airline industry is down and Jet is also struggling with the industry. But at IOB we have faith that both will bounce back. As I told you, it is a matter of balancing risks with rewards. Without such risks our Net Interest Margin (NIM) will continue to suffer.

How do you assess the financial health of IOB vis-à-vis its peers? Very few banks are challenged like Indian Overseas Bank on both the Net Interest Margin (NIM) front and the Non Performing Loan (NPA) front?

Well, our NIM has improved to 2.84% which is not as bad as you think. I think that it might improve even more to reach 3% this fiscal. But on the NPA front we have suffered a lot during the past year. That is where the downturn hit Indian Overseas Bank hard. But we are systematically tackling this, and you can expect a significant change next year.

Serious concerns have recently been raised about PSBs resorting to mass restructuring of loans to temporarily whitewash Non Performing Assets (NPAs) from the balance sheet. Won’t they come back to haunt you in the next balance sheet? What is Indian Overseas Bank’s take on this?

I feel that such assessments are not entirely true. As far as Indian Overseas Bank is concerned, we have never mixed up these two issues – restructuring and NPAs. When the going got tough for many companies this year, we too went for loan restructuring as per RBI guidelines. Each case was assessed for their current problems and future viability. IOB believes in all our restructured loans, that they can rebound once the economic situation in India and the world improves. Only where we have no faith left, have we classified as Non Performing Assets (NPAs). It might be easy to brand something an NPA. But as socially responsible bankers, it is our duty to ensure that all viable companies and feasible loans are supported. Because, even though they might seem private projects, they are national assets when we take into consideration factors like their employment potential. It is Indian Overseas Bank’s duty to ensure that they succeed and not fail. Restructuring is a tool to help them bring back to viability as soon as possible.

But the temptation is always there, isn’t it – to classify some NPA-class loans as restructured loans to bring down the NPA numbers?

Well, if that is the case, why should I declare these much NPAs as we have done? IOB doesn’t resort to such tactics. We are very transparent.

Do you mean to say that you don’t expect none of IOB’s restructured loans to come up as NPAs next year?

Yes, we don’t expect that, because we will work with them towards that end. But as you can imagine, we should also expect a tiny percentage of them not making it due to now unforeseeable factors.

How will Indian Overseas Bank 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?

Regarding NREG, I wouldn’t like to comment. About your first question, yes, when a loan waiver is in place, the government would compensate. If we had got the full compensation, what you had said would be correct. But it is not the case. I think at IOB the compensation stands at around 10% now. That means, if we had lent Rs 500 crores for agriculture, we have been compensated for only Rs 50 crores until now. When the full compensation arrives, yes, it will help our numbers.

Indian Overseas Bank has recently commissioned a second disaster recovery site at Hyderabad. Can you explain the need for this facility?

Yes, IOB has become one of the few banks in the country with a second disaster recovery site. It is a major step in the 3-Way Disaster Recovery set up we were implementing. Under this, we have a Primary Data Centre (PDC) and Command Centre in Chennai at different sites, and a Disaster Recovery Centre hosted at Hyderabad. Using technologies like auto fail-over and asynchronous replication, Indian Overseas Bank will ensure business continuity and uninterrupted service to our customers.

Will Indian Overseas Bank Get Stronger Soon?

Can Indian Bank Sustain the Turnaround?

From neck-deep in trouble a few years back, there is no doubt Indian Bank has managed a turnaround under Chairman MS Sundara Rajan.

But Indian Bank is still a poor performer in the bourses, despite having attractive P/E and P/BV ratios. There are chances that this has got something to do with the massive trust erosion the bank started facing around a decade back.

While many of the country’s top performing banks in public and private sector drastically reduced their realty exposure growth in 2008-09, Indian Bank registered a substantial growth in realty exposure to the tune of 34%. The wisdom of this step is doubtful, taking into account the numerous reports appearing throughout 2008-09 about the impending realty slowdown. And this growth is also speculated to include not just fresh disbursals, but a significant loan restructuring component.

Most public sector banks (PSBs) have resorted to such restructuring, and this move might have temporarily removed some Non Performing Assets (NPAs) from Indian Bank’s balance sheets too for the time being.

Like some other PSBs, Indian Bank’s performance also might include benefits from agricultural loan waivers and large disbursements like the National Rural Employee Guarantee (NREG) scheme.

Can Indian Bank Sustain the Turnaround?

Canara Bank’s Growth Avenues & Challenges

Though Canara Bank is trying to grow organically at 23% this year to reach a business-mix of Rs. 4,00,000 crore by opening 200 new branches as well as 10 overseas braches, Chairman & Managing Director AC Mahajan had recently opined that mergers and acquisitions are the only way to grow. This hints at the pressures the bank is facing in competing with players one rung above them like State Bank of India, Punjab National Bank, Bank of Baroda, Bank of India, and Union Bank of India.

Canara Bank is one of the four public sector banks (PSBs) that has a significant exposure to the troubled national carrier Air India. The airline has sought more time from Canara Bank to repay its existing loans.

A medium-sized public sector bank (PSB), Canara Bank has completed selecting 1800 new employees, which might add strain in a recessionary environment, especially since there is still no performance-based pay structure in place. Canara Bank needs to put such a structure in place as nearly 20% of its 45,000 workforce will retire within three years.

Canara Bank’s Net Interest Margin (NIM) is still below the comfortable 3%, unlike many of its peers. The bank faces an uphill task in improving NIM.

Canara Bank has recently put on hold a plan for selling its Non Performing Assets (NPAs) as there were no takers from the Asset Reconstruction Companies (ARCs). But it might cause Canara Bank some strain, with the worsening loan-to-value (LTV) ratios, especially in commercial properties.

Bombay Stock Exchange (BSE) has recently halted trading in derivatives of Canara Bank. The public sector bank apparently couldn’t meet the guidelines set forth by BSE. Canara Bank is the only bank to have this trading facility stopped.

Moody’s Investors Service has placed Canara Bank’s rating on watch for a possible downgrade.

Canara Bank’s Growth Avenues & Challenges

What Dena Bank’s Core Numbers Speak

Dena Bank showed significant optimism when it recorded one of the largest percentage rises in advance taxes among banks this fiscal. However, there are several serious challenges before the bank.

Dena Bank is in need of recapitalization by Indian Government to shore up its Capital Adequacy Ratio (CAR). But World Bank, from where the Government hopes to get funds for recapitalizing public sector banks (PSBs) like Dena Bank, has put forth certain conditions that is difficult to meet. It is a sensitive issue for Dena Bank as its government ownership is among the lowest of all public sector banks at just 51.2%.

Dena Bank has now sought Rs. 900 crore as recapitalization support from the government over the next two years, out of which Rs. 500 crore is expected this fiscal and the remaining in 2010-11. It will boost Dena Bank’s CAR from the present 12.07%, and will extend the bank’s lending support.

Dena Bank Chairman DL Rawal’s previous stints were with Punjab National Bank (PNB) and Canara Bank. He is widely expected to have a definite mandate till October 31st 2011 for pursuing growth avenues. Chairman Rawal’s aim is 400 more branches and a business-mix of Rs. 1,26,000 crores.

But against a net profit growth of 79% in fiscal 2008, Dena Bank’s net profit growth declined to 18% in fiscal 2009. This was quite unlike many PSBs, and hints at possible problems specific to Dena Bank.

The overall financial health of Dena Bank also needs to be significantly improved as the bank is challenged on both the Net Interest Margin (NIM) front (around 2.5%) and the Non Performing Assets (NPA) front (above 1%). Very few PSBs share this dual risk.

Like some other PSBs, Dena Bank too had recently restructured many loans – a move which is alleged to prevent some NPAs from appearing in the last balance sheets of these public sector banks.

Dena Bank’s recent performance might also include government compensating for non-performing agricultural loans, as well as large government funds like the National Rural Employee Guarantee (NREG) scheme switching to PSBs for disbursement, thereby forcing millions of hitherto un-banked to open accounts.

Though headquartered at Mumbai, Dena Bank has a sharp focus on Gujarat, which can affect the prospects of the bank positively or negatively in tune with the prospects of Gujarat, its current administration, and the state’s relationship with the new government at the Centre.

What Dena Bank’s Core Numbers Speak

Why is Axis Bank a Distant Third Against ICICI & HDFC?

ICICI Bank, HDFC Bank, & Axis Bank started out at the same time – around 1994 – when RBI allowed private banks to be set up. While all three thrived, there is no doubt that Axis Bank (then UTI Bank) has always been the distant third.

All three banks had lots in common, like their strong parents, but while ICICI Bank and HDFC Bank moved with decisive momentum throughout these 15 years, UTI Bank even had to undergo a painful name change to Axis Bank.

Even recently, while there was smooth leadership change at both ICICI & HDFC with home-grown executives, Axis Bank had to bring in ICICI veteran Shikha Sharma for the top post.

Axis Bank needs to move much quicker with painful decisions like what ICICI Bank did with their PoS terminal division recently. After a rapid innings of growing their Point of Sale (PoS) business to 1.8 lakh terminals – the country’s largest, ICICI Bank decided to sell the entire business to First Data, citing increased pressure from shrinking margins. Axis Bank is still to take a call on this, even while having only lower margins, and a PoS business of 1.2 lakh terminals.

And even while Axis Bank finds it challenging to compete with ICICI Bank and HDFC, it is facing increased pressure from public sector banks (PSBs). PSBs are lending at 11 – 12.25%, against Axis Bank’s 12.75 – 16%.

One problem with Axis Bank seems to be its split ownership between - LIC, GIC, New India Assurance, Oriental Insurance, United Insurance, & Specified Undertaking of UTI (SUUTI). Even recently, Government had to intervene when most of the partners protested LIC’s bid to take over the stake of SUUTI.

Why is Axis Bank a Distant Third Against ICICI & HDFC?

Anil Ambani Eyeing Dhanalakshmi Bank?

Is Reliance - Anil Dhirubhai Ambani Group (R-ADAG) again eyeing Dhanalakshmi Bank? If the rumours are true this time, Dhanalakshmi Bank will become the second Kerala based bank after Catholic Syrian Bank to develop insecurity, despite having a not-so-bad history.

Ever since he changed over to Dhanalakshmi Bank from Reliance Capital Asset Management Company, a Reliance-ADAG company, Managing Director Amitabh Chaturvedi has battled suspicions that a buyout by R-ADAG is imminent. Despite many refutals, the controversy refuses to die down, taking into account the advantages Anil Ambani would have with a small bank in his fold.

And Dhanalakshmi Bank is no ordinary small bank. It has a history of 82-years, an uncommon feature in the country’s private sector banking.

However, after Amitabh Chaturvedi took over the helm, Dhanalakshmi Bank has been trying to shrug off its traditional roots and re-brand as a new generation bank. The wisdom of that move is doubtful, considering their traditional and community-oriented shareholders and customers, as well as the unreliable brand image of many new generation banks.

If the Reliance-ADAG takeover rumours are true, Dhanalakshmi Bank will be the second Kerala based bank to face a similar situation, with Federal Bank trying to take over Catholic Syrian Bank.

Amitabh Chaturvedi has expressed plans to grow Dhanalakshmi Bank even by 100% to bring it within the first-five segment of private banks. But with no inorganic opportunity in the horizon, the achievability of this plan is doubtable.

Dhanalakshmi Bank recently announced a venture fund with Rs. 2000 crore corpus, a move that will give it a better long-term investment view in selected companies. The fundamentals are also good with profit for 2008-09 nearly doubling over the previous year, making it attractive for deep-pocketed investors like Reliance-ADAG.

However, some recent strategies of Dhanalakshmi Bank are enigmatic.

Even in a recessionary environment, Dhanalakshmi Bank has announced plans to double its employee base by recruiting 1300 new people. The safety of this move is not clear, taking into account the level of performance-linked wage structure in place at the bank.

Dhanalakshmi Bank had also recently entered into an exclusive deal with Bajaj Allianz to distribute their insurance products. It was a rather strange strategy as no other private bank is relying on a single insurance brand. Moreover, many peer banks are entering the insurance management business and not just the insurance distribution business.

Until recently, Dhanalakshmi Bank exhibited surprising lethargy in decisively moving forward. The Board’s reluctance to reduce a major shareholder’s stake below 10%, as well as to increase their net worth above Rs. 400 crores were surprising, as it prevented further branch expansion as per RBI norms. Similar was the case with the long delay in removing the chit clause from Dhanalakshmi Bank’s MoA. Now these three issues stand solved. But investors and customers can’t be blamed for suspecting that further such surprises might be there in the bank’s books.

Anil Ambani Eyeing Dhanalakshmi Bank?

How will United Bank of India Fare This Year?

A once award-winning bank for its support for farmers, self-help groups (SHGs), rural job creation, and NREG, Kolkata-based United Bank of India will be tested this year with major challenges like capital restructuring, initial public offer (IPO), non-performing asset (NPA) sale, a major recruitment drive, and a still-to-improve capital adequacy ratio (CAR). Under Chairman & Managing Director SC Gupta, this North-East focused bank has introduced policies like personalized biometric smart cards for farmers, and is taking a leadership role during local crises like the recent Aila hit. Seasonal Magazine checks the strategies of United Bank of India through an interview with SC Gupta who is qualified in banking, law, & engineering:

Seasonal Magazine: Why can’t United Bank of India go for its IPO with the current EPS and book value? Why do you need to reduce your capital base artificially to tweak at these figures?

SC Gupta: United Bank of India is in a peculiar situation in respect of its capital structure. While various other banks in the Industry had adjusted major portion of their losses against the Capital, thereby bringing down their capital to manageable and serviceable size, our Bank did not set off the accumulated losses amounting to Rs 1434 crore as on 31.3.1997 against capital and continued to adjust the accumulated losses from profit over the years 1997-2005 totaling to Rs 1156 crore. Thereafter, on a request made by the Bank, the Government of India allowed writing off the reduced accumulated loss of Rs 278 crore against the capital during 2005-06 bringing down the equity capital to Rs 1532 crore as on 31.3.2006. It is very clear that with such a bloated size of capital the Bank cannot go for an IPO, since the current EPS and book value of share with such large capital base would not be attractive to the investors. After the restructuring of capital , as approved by government, our equity capital would reduce to Rs 266 crore which will be comparable with other banks in the industry and which would enable us to tap the Capital Market at a suitable time.

Seasonal Magazine: Why couldn’t United Bank of India meet the mandatory norm of 40% of Adjusted Net Bank Credit (ANBC) to priority sector last year?

SC Gupta: As on March 2009, priority sector advances of the Bank stood at 41.8% of ANBC which was above the national target of 40%. Our priority sector advances grew by 17.3 percent during 2008-09 to reach Rs 11757 crores as at the end of March 2009. Lending to agriculture , MSEs and other priority sectors has been our focus area.

Seasonal Magazine: Are you worried that World Bank pre-conditions will delay Government’s capital infusion to shore up your CAR?

SC Gupta: The Capital Adequacy Ratio (CAR) of the Bank as on 31st March 2009 stood at 13.28%. We do not apprehend delay in Government’s capital infusion in the banking system as a whole. The Government has permitted our Bank to restructure the Capital and has also subscribed to the PNCPS issued by the Bank. It is expected that there will be further capital infusion by the Government. Apart from this we are also planning to come out with our IPO during the current financial year. Moreover, we have the option of raising fresh Tier II capital against the headroom available if necessary. These together with our internal generations will provide us sufficient capital to maintain at least 12% CAR .

Seasonal Magazine: United Bank of India is reportedly contemplating auctions for 100 NPAs worth Rs 300 crore. With ARCs still not eager to lap up NPAs, what will be your strategy?

SC Gupta: Recovery of NPAs is one of our top priorities. We are taking all possible steps in this direction. Organising recovery camps on a regular basis, personal follow-up of large NPAs by the executives of the Bank, making compromise settlement as per the extant guidelines , resorting to legal actions including using SARFAESI Act are some of the initiatives taken by the Bank for recovery of NPAs. As a result of these initiatives the Bank has been able to achieve a gross reduction of NPAs to the extent of Rs 552 crore during 2008-09. In addition, the Bank has been exploring the possibilities of selling NPAs to the ARCs. We have placed NPAs worth Rs 300 crore to the ARCs and after examination of the offers received thereagainst the Bank finally accepted and disposed of NPAs worth Rs 86 crore during the current financial year. The Bank has further placed NPAs worth Rs 162 crore to the ARCs which is under examination at their end. Decisions will be taken in this regard on receipt of offers from the ARCs against such amount.

Seasonal Magazine: United Bank of India has announced recruiting 1500 new employees this fiscal. How do you rationalize this move in a difficult year, even while being unable to impose a pay-per-performance wage structure as in private banks?

SC Gupta: Every vibrant organization needs proper succession planning. Process of recruitment of 1000 officers and 500 clerks has been commenced by the Bank to fill up a part of the huge vacancies which will be created out of mass retirement during next three years. Secondly induction of tech-savvy new generation of workforce and talent pool would rejuvenate our existing strong and dedicated workforce and would add more value to the organisation. Thirdly our business is thriving in leaps and bounds . To match our growth we are in recruitment spree. The “difficult year” should not be a deterrent to such recruitment. In fact, the banking sector has emerged as the biggest job generator in the current fiscal. Lastly, this recruitment would also be cost effective in the sense that the wage bill of the incoming workforce would be much less than that of retiring employees who have reached the highest pay scale. Our recruitment programme is well planned and need based.

Seasonal Magazine: Serious concerns have recently been raised about PSBs resorting to mass restructuring of loans to temporarily whitewash NPAs from the balance sheet. Won’t they come back to haunt you in the next balance sheet? What is your take on this?

SC Gupta: Restructuring of loan is an effective and established tool to support the borrowers at the time of their temporary crisis. To overcome the present economic turmoil the Reserve Bank of India has come out with specific guidelines on this score. To support the affected borrowers from the impact of sagging economy banks have gone for restructuring of loan accounts as per the guidelines of RBI. As United Bank of India has restructured eligible accounts having assets and considering genuine needs of the customers and viability of the projects to overcome the temporary crisis, this should not pose problems in future.

Seasonal Magazine: How will you counter the allegation that PSB’s performance is largly driven by government compensating for non-performing agricultural loans, as well as large government funds like the NREG switching to PSBs for disbursement, thereby forcing millions of hitherto unbanked to open accounts?

SC Gupta: Government’s relief measures to farmers by way of Agricultural Debt Waiver and Debt Relief Scheme 2008 is a boon to those farmers who have been struggling to repay their loans. This has no doubt created momentum in the recovery front of banks’ agricultural loans. For United Bank of India the proportion of NPAs out of the eligible amount is small. Further ,we have been extending fresh loan to the eligible farmers benefited under the scheme. For our Bank the total amount eligible for reimbursement from the government is only a small part of our vast advance portfolio and has negligible impact on the overall performance of the Bank. NREG is a reliable relief measure and a useful tool to bring into the main stream sections of population that feel alienated because of serious underdevelopment. United Banks of India's services to this segment is a continuous process. We have adapted our strategies to tap the opportunities and meet the challenges. One of our avowed goal is to serve the unbanked areas and the down-trodden people to translate the growth into reduction of poverty- i.e., the growth to which the poor contribute and from which the poor also benefit. Disbursement of government fund may be an opportunity to reach such people but that’s not the end. In the banking system people’s participation in large number can be ensured by building relationship and promoting banking habit for inclusive growth. Our performance is propelled by our strategies and staff commitment.

How will United Bank of India Fare This Year?

Betting on Allahabad Bank

Under Chairman KR Kamath's charge, Allahabad Bank’s non-performing assets (NPAs) have gone down, and the bank faces no emergency recapitalization.

However, Reserve Bank of India's (RBI) recent directive to stop lending below prime lending rate (sub-PLR) may affect Allahabad Bank’s prospects adversely. Its loan book is currently dominated by sub-PLR loans at 64%.

Allahabad Bank’s net profit growth declined to 19% in fiscal 2009, compared to previous year’s 30%. This was quite unlike many PSBs, and hints about possible problems specific to Allahabad Bank, apart from the ongoing downturn.

Like some other PSBs, Allahabad Bank too had recently restructured many loans – a move which is alleged to prevent some NPAs from appearing in the last balance sheets of these public sector banks.

Allahabad Bank’s recent performance might also include government compensating for non-performing agricultural loans, as well as large government funds like the National Rural Employee Guarantee (NREG) scheme switching to PSBs for disbursement, thereby forcing millions of hitherto un-banked to open accounts.

Allahabad Bank recently faced major embarrassments in the form of two fraud cases – one by EOW and another by CBI, possibly caused by failure in due-diligence by some of its frontline officers.

Not many banks have seen all three – 19th, 18th, & 20th centuries. Established in 1865 by European bankers, this Kolkata based public sector bank (PSB) is the country’s oldest joint stock bank. Chairman KR Kamath who took charge in late 2008 is the youngest CMD ever of a state-owned bank, and is known for his articulation.

Betting on Allahabad Bank