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The turnaround story of Indian Overseas Bank

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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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Indian Overseas Bank Q4 profit rises over 2-folds to ₹350 crore

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State-owned Indian Overseas Bank (IOB) on Monday reported a jump of over two times in its net profit at ₹349.77 crore in the last quarter of the fiscal ended March 2021.

The bank had posted a net profit of ₹143.79 crore in the same period a year ago.

Total income during Q4FY21 rose to ₹6,073.80 crore as against ₹5,484.06 crore in Q4FY20, IOB said in a regulatory filing.

Provisions for bad loans and contingencies for the reported quarter increased to ₹1,380.46 crore as against ₹1,060.38 crore parked aside in the corresponding period a year earlier.

For the full year 2020-21, the bank reported a net profit of ₹831.47 crore. There was a net loss of ₹8,527.40 crore in 2019-20.

Total income during the year increased to ₹22,524.55 crore from ₹20,712.48 crore in the previous fiscal year. Bank’s asset quality showed improvement with the gross non-performing assets (NPAs) falling to 11.69 per cent of the gross advances as of March 31, 2021 from 14.78 per cent by year ago same period.

In value terms, the gross NPAs or bad loans were of the order of ₹16,323.18 crore, down from ₹19,912.70 crore.

Net NPAs fell to 3.58 per cent (₹4,577.59 crore) from 5.44 per cent (₹6,602.80 crore).

The bank said its board of directors has approved the capital plan for 2021-22 under which it will issue equity shares up to a maximum extent of 125 crore shares by way of follow on public offer/rights issue.

The issue may be with or without participation from the government or to qualified institutional buyers (QIBs), the lender said.

It may be also on a preferential basis to LIC and other insurance companies or mutual funds/QIBs. The issuance of shares is subject to shareholders approval, IOB said.

Besides, the board also approved to raise tier II capital by issuing Basel III compliant bonds up to ₹1,000 crore in one or more tranches. The issue may be through a private placement or to retail segment by public issue, either domestically or overseas, it added. IOB scrip traded at ₹21.20 apiece on BSE, up 2.66 per cent from previous close.

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IOB, Central Bank privatisation bid runs into RBI hurdle, BFSI News, ET BFSI

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The Reserve Bank of India (RBI) is likely to delay regularising struggling state-run lenders that are under the prompt corrective action (PCA) framework as it has reservations over their capital adequacy levels.

This may derail the privatisation prospects of Indian Overseas Bank and Central Bank, which are reported to be among the four banks shortlisted by the government for privatisation.

Indian Overseas Bank (IOB), UCO Bank and Central Bank of India are currently under the stringent PCA of RBI.

The RBI objection

In FY21, the government infused Rs 20,000 crore in ve banks through the instruments. Central Bank of India was the biggest beneficiary with Rs 4,800 crore, followed by Indian Overseas (Rs 4,100 crore), UCO Bank (Rs 2,600 crore).

However, the RBI has raised questions over the government’s bank capital infusion programme through non-interest-bearing bonds, according to a report.

The RBI reasons that capital infusion through bonds cannot be taken at face value and, therefore, these banks may still be short of regulatory capital, they said. In such a situation, they will continue under the PCA framework. Under the PCA regime, business restraints are imposed on struggling banks until they regain health.

The government went ahead despite RBI’s initial reservations and now the regulator has expressed serious concerns. The entire fund infusion through such bonds will then not count toward regulatory capital.

RBI is not inclined to pull these lenders out of the PCA framework based on such capital infusion and may further direct lenders to recalculate their capital adequacy ratio based on the actual value of the bonds.

The PCA status

All three banks under PCA Indian Overseas Bank, UCO Bank and Central Bank have reported net non-performing assets (NPAs) below levels that trigger PCA. However, on the proforma net NPA front, Central Bank falls short as its NNPA is 6.58% against the 6% required to be out of PCA.

Even after PCA exit, these banks may still be under RBI watch. In the case of IDBI Bank, which has committed to comply with the norms of minimum regulatory capital, net NPA and leverage ratio on an ongoing basis, RBI has said the lender would be under continuous monitoring. “It has been decided that IDBI Bank be taken out of PCA framework, subject to certain conditions and continuous monitoring,” RBI had said.

Privatisation bid

Four banks on the privatisation shortlist included Bank of Maharashtra, Bank of India, Indian Overseas Bank and the Central Bank of India.

Two public sector banks and one general insurance company are expected to be disinvested this year in addition to the divestment of IDBI Bank, Finance Minister Nirmala Sitharaman had announced during Budget presentation last month.

Bringing the banks out of PCA could boost their valuations in the event of privatisation.



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IOB appoints EY as its digital consultant

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Chennai-headquartered Indian Overseas Bank (IOB) has roped in Ernst & Young as its digital consultant to transform its banking services, with an aim to boost digital transactions share.

The bank believes that EY would help it to stay more focussed on leveraging and adopting new technologies and to enhance the service quality and service delivery to its customers.

This initiative would also help the bank accelerate digitalisation in all the areas of banking, including its assets and liability products and services, according to a statement.

“With this new initiative, IOB is poised to attract Millennial customers who are tech-savvy. Bank will now be confident of providing all customers a hassle free and seamless banking experience,” said Partha Pratim Sengupta, MD & CEO of IOB.

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After recapitalisation, IOB, Central Bank move closer to privatisation, BFSI News, ET BFSI

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The government has infused Rs 14,500 crore, mainly into banks that are under the RBI’s prompt corrective action framework to improve their financial health.

Two of these banks, Indian Overseas Bank and Central Bank of India are among the four banks shortlisted by the government for privatisation.

Indian Overseas Bank, Central Bank of India and UCO Bank are currently under Reserve Bank of India’s prompt corrective action (PCA) framework that puts several restrictions on them, including on lending, management compensation and directors’ fees.

Capital infusion

Of the total infusion, Rs 11,500 crore has gone to these three banks under PCA while the remaining Rs 3,000 crore has been infused into Bank of India. According to a government notification, Rs 4,800 crore has been provided to Central Bank of India, Rs 4,100 crore to Indian Overseas Bank and Kolkata-based UCO Bank has got Rs 2,600 crore.Government Notification

The capital infusion will help these banks to come out of the Reserve Bank of India’s prompt corrective action framework.

Bringing the banks out of PCA could boost their valuations in the event of privatisation.

Central Bank of India has 33,000 staff, while Indian Overseas Bank employs 26,000.

The PCA status

All three banks under PCA Indian Overseas Bank, UCO Bank and Central Bank have reported net non-performing assets (NPAs) below levels that trigger PCA. However, on the proforma net NPA front, Central Bank falls short as its NNPA is 6.58% against the 6% required to be out of PCA.

Even after PCA exit, these banks may still be under RBI watch.

Most of the large state-owned lenders — including State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank, Union Bank of India, and Indian Bank — have already raised money from various market sources, including share sale on a private placement basis.

Rs 3.5 lakh crore bet

The government in the last five years, apart from merging some smaller banks with bigger ones, has spent Rs 3.5 lakh crore in the last five years on recapitalising public sector banks.

This has been financed partly by taxpayer money and partly recapitalisation bonds, including the discounted zero-coupon bonds sold to PSBs that are to be recapitalized.

Zero-coupon bonds

The government is unlikely to take zero-coupon bond route to further recapitalise public sector banks after the Reserve Bank expressed some concerns in this regard, sources said. The government, they said, would resort back to recapitalisation bonds bearing a coupon rate for capital infusion in these banks.

To save the interest burden and ease the fiscal pressure, the government last year decided to issue zero-coupon bonds for meeting the capital needs of the banks.

The first test case of the new mechanism was a capital infusion of Rs 5,500 crore into Punjab and Sind Bank by issuing zero-coupon bonds of six different maturities last year. These special securities with tenure of 10-15 years are non-interest bearing and valued at par.

However, the RBI raised some concerns with regard to the calculation of an effective capital infusion made in any bank through this instrument issued at par.

Since such bonds usually are non-interest bearing but issued at a deep discount to the face value, it is difficult to ascertain net present value.



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SBI General Insurance, IOB sign bancassurance pact

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SBI General Insurance and Indian Overseas Bank have signed a bancassurance agreement for distribution of non-life offerings.

“Through the alliance, SBI General will offer a range of general insurance solutions and innovative products to IOB customers,” said a statement on Monday.

“IOB’s extensive reach in Tamil Nadu region will help in wide distribution of products to customers in the region…The partnership will improve penetration in urban, Tier II, and Tier III markets and will also help create awareness about personal lines of insurance,” said PC Kandpal, Managing Director and CEO, SBI General Insurance.

IOB operates from Chennai with over 3,200 branches across the country.

“This tie-up will help expand our bouquet of Insurance product to our consumers,” said Partha Pratim Sengupta, Managing Director and CEO, Indian Overseas Bank.

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IOB nets Rs 213 crore profit; says it’s matter of time it comes out of PCA

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IOB, which was under Prompt Corrective Action (PCA), said it has been posting profits for four consecutive quarters and almost fulfilled all the requirements to come out of the PCA.

Chennai-based public sector lender Indian Overseas Bank (IOB) on Tuesday reported a net profit of Rs 212.87 crore for the third quarter of FY21 as compared to a net loss of Rs 6,075 crore in the corresponding quarter of the previous financial year.

The bank has recorded an increase of 11.3% in its total income to Rs 5,786.54 crore as against Rs 5,197.94 crore. IOB, which was under Prompt Corrective Action (PCA), said it has been posting profits for four consecutive quarters and almost fulfilled all the requirements to come out of the PCA.

Speaking to media persons after releasing the earning performance, through virtual mode, Partha Pratim Sengupta, MD & CEO, IOB, said the bank plans to come out of PCA by focusing on recovery, low-cost deposits and less capital consuming advances.

“For the last four quarters, we have been making profit consistently. When compared with Q3 performance of FY20, there was a marked improvement in all key parameters. It is a matter of time for us to exit PCA and is up to the regulator to decide,” he said.

IOB had received a capital infusion of over Rs 8,000 crore in two tranches during the last two quarters of the last financial year, which helped the loss-making bank restart the business with a clean slate. Coupled with recovery and asset-light advances, the bank could achieve profits during the last four quarters.

The MD said there has been perceptible change in NPA levels achieved through recovery measures.

“Currently, the bank has a carry forward loss of Rs 17,500 crore. Our aim is to recover at least Rs 1,000 crore per quarter. In the first quarter of FY21, we recovered about Rs 200 crore due to lockdown, followed by Rs.760 crore and Rs 1,055 crore, respectively. Going forward, the focus will be on recovery in excess of Rs 1,000 crore and it will add to our bottom line,” he said.

According to him, IOB has evolved a policy of not taking fresh exposures in stressed sectors while the bank had exited from accounts in the stressed sectors, wherever feasible.

During the quarter, gross non-performing assets (GNPAs) reduced to Rs 16,753 crore from Rs 23734 crore and stood at 12.19% as against 17.12% and net NPA was contained at Rs 3,905 crore, as compared to 7,087 crore, which was 3.13% as against 5.81%. The provision coverage ratio improved to 91.91% from 86.20%.

While interest income contracted to Rs 4,244 crore from Rs 4,352 crore, other income rose 82.36 % to Rs 1,542.82 crore. Net interest margin stood at 2.45%.

He said around Rs 18,000 crore worth NPAs are awaiting NCLT’s resolution, while Rs 3,000 crore assets was expected to be restructured.

IOB had board’s approval to raise up to Rs 5,500 crore capital. He said the bank needed only Rs3,000 crore and the timing of the issue will be decided at a later date.

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