The turnaround story of a private sector entity gets a lot of attention while the tendency is to brush off anything that pertains to a public sector organisation’s success.

The Chennai-headquartered public sector lender Indian Overseas Bank’s efforts in achieving a turnaround in six years is nothing short of an impressive saga. The turnaround experience of the 84-year-old bank provides a valuable lesson on team effort, and also busts several myths about the leadership of public sector entities.

Amid speculation over its privatisation and the euphoria over its benefits, the successful turnaround of Indian Overseas Bank (IOB) is worth recounting as to how the team pulled it off.

The crisis started for the public sector lender in 2015-16 when the bank posted a net loss of ₹454 crore after reporting strong profit several years before that. The losses started mounting to ₹2,897 crore in FY16 and ₹3,417 crore in FY17.

A few major factors were reported to have caused deterioration in IOB’s performance.

Borrowing normally takes place after a clear plan for deployment. Else, it will cause a huge interest burden. But in IOB’s case, huge overseas borrowings, with no proper plan for deployment, caused a huge dent to the balance sheet.

Aggressive lending

With adequate capital in hand, the company resorted to aggressive lending, particularly to large corporates. While its exposure to this large corporate segment increased significantly, which was never a case in the history of IOB earlier, most of the large corporate accounts turned bad (NPA) in the subsequent months, wreaking havoc on the bank’s balance sheet.

The exposure to large corporate grew significantly from a small share in the book to fund-based exposure of ₹84,634 crore and non-fund exposure of ₹17,478 crore in 2014-15.

Also, reckless branch expansion without adequate resources, led to more branches incurring losses. Between 2010-11 and 2013-14, the bank opened more than 1,250 new branches which never happened in the history of IOB.

To add to the bank’s woes, poor IT systems and absence of a mechanism for monitoring customer complaints worsened the situation.

High contraction of credit led to rise in gross NPAs and the situation started turning worse with poor credit offtake and ballooning bad loans in the subsequent years. Consequently, the bank was put under the PCA (prompt corrective action) programme by the RBI from September 2015.

R Subramaniakumar, who served Punjab National Bank, was appointed as MD and CEO of the bank in May 2017. When he took charge, the bank reported its highest-ever net loss, Gross NPA of more than ₹35,000 crore and net NPA close to ₹20,000 crore. Also, almost one-fourth of the branches were making losses with a huge number of customer complaints.

Turnaround programme

In 2017, R Subramaniakumar and his team embarked on a massive turnaround programme, with a multi-pronged strategy under which it used INR surplus swap option, rebalanced its portfolio by significantly reducing exposure to large corporates, brought in huge HR focus, and perfected the IT systems.

“The revival programme was taken up with participation of entire IOB staff, unions and others as everyone showed enthusiasm for the revival of the bank,” says a former top official of the bank.

Under HR focus, the management resumed promotions to boost the morale of staff, which was at historic low due to various issues. People were recognised for work and performance. Another important focus area that contributed to the turnaround was the restoration of IT system. Since there was no centralised mechanism to monitor complaints and offer solutions, complaints surged, and at one point, there were more than 9,000 complaints, including disputes in ATM and other issues. The formation of multiple IT teams with additional training support from IT major Infosys helped reduce complaints drastically over a period of 6 months with several processes getting automated. The number of loss-making branches was reduced to low single-digits from 25 per cent earlier.

“IT automation gave a big boost to the bank by way of stability, customer confidence while boosting the morale of staff,” says a former senior official of the bank.

Under rebalancing of credit portfolio plan, the bank moved away from the large corporate segment and created a separate team for mid-corporate loans, while accelerating the focus on RAM (retail, agriculture and MSME) segment, the share of which grew significantly from 40 per cent in 2017 to 65 per cent in the subsequent years (now RAM is about 74 per cent of total domestic advances). Also, CASA share was increased to one-third in FY18 from one-fourth earlier (now it has touched 43 per cent), while additional focus on non-interest income has boosted its performance.

IOB’s multi-pronged initiatives started yielding positive outcomes; it exhibited improvement in reducing the gross and net NPAs and upgraded the provision coverage ratio from 53.63 per cent in FY17 to 71.39 per cent in FY19. Automation of NPA administration like transparent OTS settlement and identifying the early warning signal accounts helped the bank contain fresh slippages and improved the NPA recovery.

The bank carried forward the turnaround measures under Karnam Sekar, who took charge as the MD and CEO of the bank in July 2019. Though losses continued, the December 2019 quarter saw its net NPA falling below six per cent, helped by the government’s capital infusion of ₹4,360 crore and other measures.

Returns to black

With reduction in NPAs and provisions, the bank swung into profit mode in Q4 of FY20 and it maintained its profitability in the following four quarters. Finally, the bank returned to black after suffering losses for six years in a row.

IOB’s net profit in March 2021 quarter more than doubled to ₹350 crore (₹144 crore in March 2020 quarter). Its net NPA declined to 3.58 per cent in March 2021 quarter from 5.44 per cent in March 2020 quarter.

For FY21, it posted a net profit of ₹831 crore against a net loss of ₹8,527 crore in FY20. Its gross NPA was ₹16,323 crore, while net NPA was below ₹5,000 crore (₹4,578 to be precise). Provision coverage ratio has improved from 53.63 per cent in FY17 to 90.34 per cent in FY21.

The current MD and CEO, Partha Pratim Sengupta, said it was a great achievement by Team IOB to script the turnaround and the bank was confident of continuing the performance in the coming years.

The bank has written to the RBI to move out of the PCA framework and the exit will help the bank focus on future growth and other opportunities. It has also planned for a capital infusion of ₹2,000 crore in this fiscal to support its growth plans.

Senior officials of the bank say IOB carries huge potential to emerge as one of the strongest banks in the mid-segment as it has introduced strategic changes, supported by the motivated staff.

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