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What went wrong at Indian Overseas Bank

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Aggressive lending: check.

Irresponsible expansion: check.

A leader with a big appetite for risk and focus only on the immediate future: check.

Lack of a proper systems to verify the customer history or recover bad loans: check.

These are some of the real reasons behind the crisis at Indian Overseas Bank (IOB) that forced banking regulator Reserve Bank of India to initiate a prompt corrective action at the Chennai-based lender to curb bad loans, improve internal controls and consolidate business activities, according to former and current company executives, banking industry veterans, ratings agencies and analysts familiar with the workings of IOB.

While IOB took 74 years till 2010 to reach a loan size of Rs. 80,782 crore, that number more than doubled to Rs. 1.81 trillion in the next four years when M.Narendra was in charge of it.

Narendra was like a naughty boy in a toy shop, said a senior banker who worked with him, referring to his tendency to do things without considering their repercussions in this case, the impact on the bank s profitability.

The former chairman and managing director s approach of acquiring high cost deposits to fund the bank s loan growth was a basic error, the banker pointed out, speaking on condition of anonymity.

Narendra declined to be interviewed for this story.

A month after he took the helm of IOB in late 2010, Narendra talked publicly about his plans to expand its total business (deposits and loans) to Rs. 2.5 trillion by the end of the financial year. That meant the bank had to add about Rs. 40,000 crore in four months.

Narendra exceeded his target; IOB had total business of Rs. 2.59 trillion as of 31 March 2011.

The bank s loans rose on average at 27.1% year-on-year during a three-year period (2010-2011 to 2012-13) much higher than the industry average of 17.5%.

During Narendra s tenure (1 November 2010 to 31 July 2014), high-cost deposits to overall deposits climbed 19.8% to Rs. 45,000 crore (as on 31 March 2014) from just 3.85% to Rs. 4,030 crore four years previously.

Narendra also decided to push the pedal on expansion even when some others at the bank advised him against it and expressed his desire to boost branch count to 3,000 from 2,015 and automated teller machine (ATM) count to 3,000 from 900.

The bank adopted an aggressive strategy with respect to advances growth in an environment where it would have been prudent to grow at a more modest pace, given slowdown in the economy, said Vaibhav Agrawal, vice-president (research, banking) at Angel Broking Ltd, who used to cover the bank s stock until two years ago.

The chairman did not use his discretion on large loan proposals, lacked the ability to say no and was not diligent about verifying a customer s repayment history or balance sheet that would have normally triggered red flags, said another official who closely worked with Narendra. He too spoke on condition of anonymity.

Narendra shares some traits with ex-Indian Bank CMD M.Gopalakrishnan, under whose tenure in 1995-96 the Chennai-based bank posted a net loss Rs. 1,727 crore, wiping out the entire capital base of the bank in what is considered to be one of the biggest scandals in Indian banking history.

Like Gopalakrishnan, Narendra craved public recognition and did not say no even when he should have, said a long-time banker aware of the matter on condition of anonymity.

Sure, no one is accusing Narendra of being corrupt.

We cannot doubt Narendra s integrity, although as a banker, one cannot say yes to everything as we are just trustee of the bank, said a retired senior bank official, who did not wish to be identified.

The result: IOB currently tops the list of 24 listed public-sector banks that have at least 5% or more gross non-performing assets (NPAs). As of 30 September, the bank had total bad loans of Rs. 19,400 crore (11% of the loan book) compared with Rs. 3,326 crore (3.78%) five years ago.

The bulk of the loans that went sour were made to large companies in stressed sectors such as infrastructure, steel and power. The bank often made these loans through a consortium.

Era Infra Engineering Pvt Ltd tops the bad loan list with exposure of Rs. 675 crore, exceeding REI Agro Ltd with Rs. 400 crore. Some of the bad loans in excess of Rs. 300 crore were made to Parekh Aluminex Ltd, Sion Panvel Tollways Pvt. Ltd, Binani Cement Ltd, ABG Cement Ltd and Century Communication.

Generally, loan proposals of over Rs. 250 crore are vetted and decided by the management committee of the board, including the chairman and managing director and two executive directors.

To be sure, bad loans have surged at most Indian banks the outcome of slower economic growth in recent years and project hold-ups that crimped corporate cash flows and made it difficult for borrowers to repay debt. Gross NPAs of 38 listed banks in the September quarter rose 6.24% to Rs. 3.37 trillion from Rs. 3.17 trillion a year earlier, according to Mint research.

Since Raghuram Rajan took over as RBI governor in September 2013, the central bank has tightened provisioning norms for bad and restructured loans.

In June, RBI announced new norms for so-called strategic debt restructuring, under which banks can swap debt into equity and take over the management of defaulting borrowers.

Reining in a demon

RBI initiates a prompt corrective action whena bank breaches limits in terms of under-capitalization, high bad loans, or return on assets. IOB s return on assets was less than 0.25% the stipulated benchmark.

Its earnings were also hurt by a sharp increase in provisioning costs, ratings agency Crisil Ltd said in an October report. Provisioning costs refer to the funds that banks have to set aside from their profits to meet any loss arising from bad loans.

Huge provisions made due to the burgeoning bad loans led to lower returns on assets, said R. Koteeswaran, who took charge as the bank s chief executive and managing director on 31 December 2014 and has spent most of the time since fire-fighting.

It is the demon (bad loans) we are trying to rein in, said Koteeswaran, whose name means millionaire in Tamil. It is going to take time for the bank to rebuild and cut down on bad loans.

With just seven months for Koteeswaran to retire on 30 June 2016, it may well take the bank at least another two years to get back on the growth track.

The banking regulator has told IOB to stop recruitment, curtail expansion, not enter any new lines of business, cut down on costly deposits, and improve its systems for recovery of bad loans and contain them.

Checks and balances

IOB s bad loans are among the highest for public-sector banks, according to Crisil. To add to its pain, the bank will have to write off around Rs. 1,500 crore tied to seven accounts as they are considered to be fraudulent, said another senior bank official who too spoke on condition of anonymity.

The bank s main auditors Delhi-based P.R Mehra and Co. and the Ludhiana-based Dass Khanna and Co. didn t respond to Mint s queries seeking comment.

There are checks and balances so that important decisions are taken to protect the interest of all stakeholders. How could this happen when there is a government-nominated director, RBI-nominated director and two shareholder directors on the board of the bank? questioned C.H. Venkatachalam, general secretary at All India Bank Employee s Association, one the of largest bank unions. He served on the board of Central Bank of India from 1987 to 1992.

IOB breached the benchmark on low return on assets even as early as 31 March 2013 the first sign the bank was in trouble; although it was not evident. The banking regulator initiated corrective action only two-and-a-half years later.

RBI did not respond to Mint s queries.

The regulator gives time for a bank to improve its performance before it initiates such action. From April 2013, IOB slowed its pace of lending and branch expansion, but the damage had already been done.

Traditionally, banks had the flexibility to restructure corporate loan defaults. The thinking was that at least some of the projects, against which these loans had been issued, were good ones delayed by a sluggish economy.

The central bank, however, believed that such restructuring allowed banks to hide bad loans and told banks to get stricter with their definitions from 1 April. That resulted in a spurt in the bad loans on the books of banks. At IOB, it made the problem worse.

First Published: Fri, Nov 27 2015. 12 16 AM IST


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