Letter addressed to Shri M.S. Verma regarding constitution of the Working Group
	Questionnaire sent to the three weak banks
	Constitution of sub-groups
	Sub-group report on Indian Bank – Executive Summary
	Sub-group report on UCO Bank – Executive Summary

Annex 1

Letter addressed to Shri M.S. Verma regarding constitution of the Working Group

DEPUTY GOVERNOR	RESERVE BANK OF INDIA,
	CENTRAL OFFICE,
	SHAHEED BHAGAT SINGH ROAD,
	MUMBAI – 400 001. INDIA.

D.O. DBOD.BP.2059/21.04.110/99

February 6, 1999

Dear Shri Verma,

Working Group on Restructuring of Weak Public Sector Banks

It has been decided to set up, in consultation with the Government of India, a Working Group under your Chairmanship, to suggest measures for revival of weak public sector banks with the following members:

(i) Shri K.R.Ramamoorthy, Chairman, Vysya Bank Limited, Bangalore,

(ii) Shri M.M. Chitale, Chartered Accountant (former President, Institute of Chartered Accountants of India),

(iii) Shri P.K.Choudhury, Managing Director, Investment Credit Rating Agency, New Delhi,

(iv) Shri J.R.Prabhu, former Executive Director, Reserve Bank of India, and

(v) Dr. Sushil Chandra, former Director, International Management Institute, New Delhi.

2. The terms of reference of the Working Group are as under:

[a] Criteria for identification of weak public sector banks;

[b] To study and examine the problems of weak banks;

[c] To undertake a case by case examination of the weak banks and to identify those which are potentially revivable;

[d] To suggest a strategic plan of financial, organisational and operational restructuring for weak public sector banks.

Shri C.R. Muralidharan, General Manager, Reserve Bank of India, Department of Banking Operations and Development, Central Office, Mumbai, will be the Member Secretary.

The report of the Working Group may please be submitted to us by 30^th June, 1999.

With regards,

Yours sincerely,

Sd/-

[S.P. Talwar]

Shri M.S. Verma,
Hon. Advisor to the Reserve Bank of India,
Reserve Bank of India,
Main Building,
Mumbai.

Annex 2

Questionnaire sent to the three weak banks

NAME OF THE BANK:

PROFILE (as on 31.03.99)

A. (i) Number of offices and staff

	No. of people
ADMINISTRATIVE	Supervisory	Award Staff
Head Office
Zonal Offices
Divisional Offices
Total
OPERATING
Branches
Sub-branches/offices/
extension counters
Total
GRAND TOTAL

(ii) Geographical spread

INDIA:

Name of the	Administrative			Operating offices
State	offices				Sub-	Extension
	HO	ZO	Div.	Branches	branches	counters

ABROAD:

Name of the	Administrative			Operating offices
Country	offices				Sub-	Extension
	HO	ZO	Div.	Branches	branches	counters

 

(iii) Staff concentration

Concentration	Head Office	Zonal	Divisional	Branches
Category		Office	Offices
Very large (with
more than 300
employees)
Large (101 – 300)
Big (51 – 100)
Medium (21 – 50)
Small (8 – 20)
Very small (7 – 1)

B. (i) Business Handled

	1997-98		1998-99		1999-2000
	Amount	Market Share	Amount	Market Share	Amount	Market Share
Aggregate
deposits
Aggregate
advances
Net profit/losses
Accumulated
losses, if any

(ii) Business Concentration

		In terms of	In terms of	In terms of
		deposits (%)	advances (%)	profits (%)
10 largest branches
account for
25	-do-
50	-do-
100	-do-
300	-do-
500	-do-
Note:	Largest for the purpose means largest for the particular kind of business,
	i.e., deposits or advances

(iii) Profit dispersal amongst branches

Metropolitan		Profit making	Loss-making
Urban
Semi-urban
Rural
Total

GENERAL STATE OF AFFAIRS

Current and projected basic ratios indicating financial strength:

	31 March	31 March	31 March	31 March
	1998	1999	2000	2001
			(Projected)	(Projected)
Capital adequacy
ROA (Return on assets)
ROE (Return on Equity)
Equity on Asset
Non-performing Loan/
Total Loan
Non-performing Assets/
Total operating revenue
Total Expense/Total
Income
Non-interest expense/
operating revenue
Where projections are made, assumptions behind these projections should be stated clearly. Such assumptions could be about markets, management of NPAs, asset restructuring and recapitalisation. The extent of additional recapitalisation required and the expected source from which such recapitalisation is expected should also be stated.

STRATEGY

1. Position in the industry / market

1.1 How do you view the future of commercial banking in India in the next 3/5 years in terms of number and type of players and the impact of competition on this structure?

1.2 What is your bank’s vision and objectives? What positioning do you envisage for your bank in the market; a bank with countrywide importance, regional importance or operating in a niche or any other.

In your view what will be your share of business in the total market?

1.3 Do you have a strategy charted out to achieve the above stated vision/ objective? Will there be any pre requisites, preconditions for you to be able to implement the desired strategy?

Operating strategy

1.4 How precisely (i.e. by changing customer focus, modifying product line, reduction in cost of delivery, identifying new businesses and converting them into additional streams of revenue, improvement in technology etc.) will you meet the intensifying competition in the sector. How, in particular, do you expect to fare against the highly technologically advanced private sector/ foreign banks that are also largely free from any legacy of the past ?

1.5 Do you have and/or expect to develop any distinctive strategic advantage and skill sets, which will drive your product/customer focus in the revival strategy?

1.6 What levels of Net interest margin (NIM), Net interest income (NII) ratio of Non-interest income to total income, expense ratio, do you estimate will be necessary for you to be able to generate an acceptable return on equity say 15%?

Corporate Governance

1.7 Do you consider that any change in the structure of your Board of directors will be helpful in your implementing the desired strategy. If so, what kind of structural changes in the constitution of the Board are considered desirable?

1.8 Do you expect the Board to play a decisive role in setting strategy and overall performance targets?

1.9 Is the current decision making process in your bank, particularly relating to credit and investments seen as sound and quick so as to ensure retention of present clients and acquisition of acceptable new ones? If you envisage any changes therein, what would these be?

Management

1.10 How do you propose to organise your core team to drive change and implement the revival strategy successfully?

1.11 How do you propose managing the basic problems of acquiring a reasonably good number of new clients and retaining the existing ones?

What are the required investments and resources to do so?

1.12 Does your bank have a reasonably good percentage of high performers at different levels amongst your total staff strength (say, 12 – 15%) upon whom reliance could be placed to drive the revival strategy? In the present none-too-enthusing scenario how do you propose to keep them motivated? What kind of scheme of empowerment and/or incentive(s) would help you place the bank on the path to long term profitable performance?

Organisational structure

1.13 Is the bank’s organisational structure adequate to achieve its current objectives? Do you consider any change therein necessary?

1.14 Has any attempt been made or is being made to effect any change in the structure? What is your estimation of the financial and human resources required for effecting the desired change?

2. Business capability

2.1 Are there any clearly identified skill strengths in each or any of your major business lines today?

2.2 Are there any identified skill gaps? Do you think that these gaps can be closed effectively within a reasonable time so as to ensure that future of the bank is not jeopardised?

2.3 What is your plan to close the gap? Has it been initiated already and how long do you think it will take to complete?

2.4 What is the Bank’s present efficiency ratio (as on 31.3.98 and 31.3.99)?

2.5 What is the efficiency ratio, you think the Bank will achieve by the end of 1999-2000 and 2000-2001?

Technology

2.6 What is the extent of computerisation achieved in your bank so far?

Please indicate in terms of:

(A) Business

(a) Number of branches computerised

(i) only back office

(ii) full branch

(b) Percentage of total business covered by computerisation

(i) Deposits

(ii) Advances

(iii) Other business

(B) Percentage of total M.I.S. covered by computerisation

2.7 Has the Bank at present a working ALM system. Is the M.I.S. in the bank aligned to the ALM system ?

2.8 Does the bank have any system for credit scoring, credit portfolio management and early warning systems?

3. Management of Non-performing Assets

3.1 What is the percentage of Non-performing assets to Aggregate assets?

	31.3.97	31.3.98	31.3.99	31.3.2000
				(projected)
Gross
Net

Please give market segment-wise details. Also indicate what % of the total is represented by the top 200 accounts under each head.

3.2	What is the percentage of Non-performing loans to Aggregate loans?
		31.3.97		31.3.98	31.3.99	31.3.2000
						(projected)
Gross
Net

Please give market segment-wise details. Also indicate what % of the total is represented by the top 200 accounts under each head.

3.3 What is the current estimate of Losses from :

(i) Net non-performing assets

(ii) Net non-performing Loans

Please state separately the extent of security cover available in respect of NPAs (independent of provisions)

3.4 Has any special set-up been created within the bank to address the problem of NPA? If so, please provide details (organisation, processes, number and amount of accounts specially focussed upon as well as success achieved so far/likely to be achieved in future.

	1997-98	1998-99	1999-2000	2000-2001
By upgradation
Recoveries
Compromise
settlements
Write-off
Total

3.5 What is the current rate of N.P.A. generation? (calculated as % of new NPAs identified during a year to aggregate performing assets/Loans at the beginning of the year)

3.6 Would you favour the idea of transferring whole or part of your bank’s NPAs to a separate Asset reconstruction company (ARC)?

3.7 Would you favour the idea of transferring NPAs to an independent ARC even if the transfer value agreed upon turns out to be lower than their book value?

3.8 What do you suggest should be the criteria for transferring assets to the proposed ARC?

3.9 Based on the criteria proposed by you what are the numbers and amount of your NPAs, which will get transferred to the ARC?

3.10 What will be the projected results of the transfer of NPAs (a) Impact on existing earning assets (b) Impact on growth of assets (c) Impact on required provision levels (d) Impact on the banks profitability

3.11 Have you any alternative/additional plan for handling your bank’s NPAs already under implementation or proposed to be implemented shortly?

Please give details and its expected impact.

4. Financials – Cost and Revenue Revenue

4.1 Are the margins available on your different products adequate to render the overall operations of the bank profitable?

4.2 In respect of which of your bank’s revenue sources, you think an increase is likely and/or anticipated in the near future. Have you initiated or are likely to initiate in the near future any measures to achieve?

4.3 What will be the impact of such increase(s) on your bank’s profits and by when?

4.2 What is your bank’s present level of Non-interest income and what improvement therein is planned in the next three years? Give details of these plans and their operationalisation?

Cost

4.5 What is your current efficiency ratio and what are your plans for improving it in the years 1999-2000, 2000-2001 and 2001-2002?

4.6 Does the Bank have any plans for productivity improvement? Give details and an idea of the time frame in which its results can be visible.

4.7 What management process do you plan to use to measure and monitor productivity improvement in each major business segment and back/front office functions?

4.8 If margins and levels of business do not improve substantially in the near future there will be no alternative to cost reductions. What plans in these regards can be followed?

a. Reduction in the number of branches

b. Reduction in the number of staff, say, by way of VRS

c. Wage freeze/cut

d. Others

5. Need for recapitalisation

5.1 Based on stipulated capital adequacy requirements as also the proposed business plans and the financial projections, what would be the required recapitalisation as at the end of the years 1999–2000, 2000–01 and 2001-02.

5.2 What would be the proposed source of the recapitalisation and can it be reasonably assumed on the basis of currently available indications that the anticipation in regard to the source is realistic?

6. Future potential

6.1 Has the bank been successful in retaining customers in the past two years, i.e., 97-98 and 98-99?

6.2 How many new accounts (other than advances in the priority sector under different government sponsored schemes) were opened in the past two years?

	1997-98		1998-99
	Advances	Deposits	Advances	Deposits
Corporate
Retail
Total

6.3 (a) Have you conducted any retail customer satisfactory survey in the past 2 years?

(b) Have you conducted any commercial customer satisfaction survey in the past 2 years?

6.4 Does your bank have a System/M.I.S., which can calculate profit by customer segment/product line/individual customer?

6.5 Are the accounting system and the M.I.S. in the bank designed to give a reasonably precise idea of the cost involved in offering any product/ service to the clients?

FINANCIAL STATEMENT – BALANCE SHEET

(Rs. crore)
	Past Performance			Projections
	1997	1998	1999	2000	2001	2002	2003	2004
Assets
Cash, bank deposits, money
Markets
Recapitalisation Fund
(Bonds) already received
Loans – Performing
(Provisions for Loans)
Loans – Non performing
(Provisions for Loans)
Government Securities
Corporate Debentures
Equity
(Provision for securities)
Fixed assets
Other assets
Total Assets
Liabilities and Equity
Deposits – Demand
Deposits – Savings
Money Market funding
Borrowing – domestic
Borrowing – foreign
Other liabilities
Total Liabilities
Net Assets (Liabilities)
Shareholders equity

FINANCIAL STATEMENT – PROFIT AND LOSS STATEMENT

(Rs. crore)
	Past Performance		Projections
	96/97	97/98	98/99	1999/	2000/	2001/	2002/	2003/
				2000	01	02	03	04
Total interest income
Total interest expense
Net interest income (NII)
% of operating revenue
Other income (e.g., investments)
Other expenses (FX.,investment)
Non interest income
% of operating revenue
Total net revenue
(Operating revenue)
Provisions for loan losses
Staff expenses
Other operating expenses
Total non interest expense
(Other expense)
Profit/(loss) before tax
Income Tax %
NET INCOME/(LOSS)

Annex 3 Constitution of sub-groups
Name of the	Members
Bank
Indian Bank	Shri P.K. Choudhury	Member of Working
		Group
	Shri K. R. Ramamoorthy	Member of Working
		Group
	Shri R. Raghuttama Rao	Executive Director, ICRA
		Advisory Services
	Shri V. Sriram	Consultant, ICRA Advisory
		Services
	Shri N. Mahesh	Consultant, ICRA Advisory
		Services
	Shri G. Sreekumar	AGM and EA to Hon.
		Adviser, Reserve Bank of
		India
UCO Bank	Dr. Sushil Chandra	Member of Working
		Group
	Shri J.R. Prabhu	Member of Working
		Group
	Shri C.R. Muralidharan	Member Secretary of
		Working Group
	Ms. Anjali Gupta	Asst. Vice President, SBI
		Capital Markets Ltd.
United Bank of	Shri M.M. Chitale	Member of Working
India		Group
	Shri Kishore Gandhi	Director, CRISIL
	Shri George Mathew	Manager, CRISIL
	Shri N. Shankar	Manager, CRISIL
	Shri Pathik Gandotra	Manager, CRISIL
	Ms. Sudha Damodar	Deputy General Manager,
		Reserve Bank of India
Note: The sub-groups were also assisted by General Managers of the respective banks.

Annex 4

Sub-group report on Indian Bank Executive Summary

1. Indian Bank has a four-tier organisation structure. The bank has 1,492 domestic branches and 34 regional offices, which are controlled by 11 zonal offices. More than 60 per cent of the branches are in semi-urban and rural areas. Nearly three-fourths of the branches are in the southern states. The bank has lead bank responsibility for 13 districts spread across three states and one union territory. Gross profit of all the four RRBs sponsored by the bank was Rs. 10.34 crore as on 31 March 1999.

2. The financial position of the bank has steadily deteriorated over the last five years. The accumulated losses as on 31 March 1998 amounted to Rs. 2,403 crore. With the losses for 1998-99 expected to be about Rs. 850 crore, the accumulated losses will amount to Rs. 3,253 crore as on 31 March 1999. With the exception of one year (1994-95), the bank has posted operating losses for the last six years. In 1994-95, the bank was able to post a profit on account of non-classification of certain assets as non-performing.

3. The bank has a capital of Rs. 2,503.96 crore as on 31 March 1999.

It has received special securities and recap bonds aggregating Rs. 2,484.96 crore at varying coupon rates. An infusion of Rs. 1,750 crore was made in February 1998 based on a strategic revival plan. Capital adequacy turned positive after two years and reached 1.41 in March 1998 but will again turn negative in March 1999.

4. Though the bank was able to achieve the targets in terms of resource mobilisation and the deployment of funds, there was a sharp reduction in net interest income of the bank on account of high interest rate risk. The inherent weak position and poor earnings of the bank was accentuated by a fall in interest rates during 1997-98.

5. The reasons for the bank’s continued poor performance are:

a. High levels of non-performing assets.

b. High operating expenses compared to earning assets.

c. Funding of accumulated cash losses.

d. Adverse movement of interest rates.

6. The problems of the bank can be classified into two phases. The first phase covers the pre-1996 period when there was a gradual deterioration in all areas of banking, viz., quality of advances, reliance on high cost funds, slow growth in core deposits and poor governance. This phase saw a period of excessive unplanned credit growth between 1988 and 1992. While credit grew at a CAGR of 28.8 per cent, deposit grew at 21.1 per cent resulting in excessive borrowings. The bank was subjected to high interest and liquidity risks given the nature of funding sources and the interest cost on borrowing reached a peak of 20.9 per cent during 1991-92.

7. The Reserve Bank of India imposed restrictions on credit expansion in August 1992. The period 1992 to 1994 saw a modest credit growth of 7.8 per cent and a deposit growth of 17.8 per cent. However, the effect of the previous unplanned credit growth started to show up. In 1994, when the Reserve Bank lifted the credit embargo, the bank once again resorted to credit growth in excess of core deposit growth and ended up borrowing nearly Rs. 3,000 crore during 1995-96 to fund the growth. The credit growth was in new and high-risk areas. The bank ran a huge asset liability mismatch and interest risk. With high levels of NPAs, poor quality of advances in high-risk sectors and an unfavourable asset liability position, the bank started making huge losses from 1996 onwards.

8. The post-1996 phase was characterised by a structural problem.

The huge NPAs and asset liability mismatch were an overhang on the bank. The initial years in this period were devoted to cleansing operations of bad loans and implementing of control systems. The bank was concentrating more on correcting the asset liability mismatches by restructuring the liability side of the balance sheet. Credit sanction was centralised at the head office and the operational tiers were directed to concentrate on recovery.

9. The cleaning up operations entailed stringent disciplinary action within the bank. This resulted in a spate of cases being opened up on advances sanctioned during the earlier period. This acted as a dampener in decision making and there was and continues to be reluctance in decision making at all levels. This has resulted in the bank making no progress in disbursing fresh credit or in recovering bad loans. The only area in which the bank performed reasonably was deposit mobilisation. Recently, there has been a relaxation in the credit sanction policies and the discretionary powers of the various authorities have been restored.

10. The lack of direction in terms of growth targets and upgradation of skills have left the bank in a state of organisational paralysis. There is no will to take decisions at the operating level. The excessively long time taken to process credit and compromise proposals for non-performing assets has resulted in loss of business.

11. The lack of business growth and the high levels of NPAs resulted in a disproportionate increase in wage costs as compared to the earning assets of the bank. While the wage costs increased at the average industry rates, the balance sheet of the bank shrunk. Thus, the bank has an inherently adverse cost structure.

12. The bank achieved an average deposit growth of 15 per cent over the last three years though much of it was in high cost term deposits. Credit grew at an average of about 5 per cent mainly due to food credit. In terms of non-food credit there was a decline in 1996-97 and 1997-98. As a consequence of low credit growth, the fee income has also suffered. Further, the discretionary powers of branch managers for purchase of cheques and drafts were withdrawn.

13. The bank concentrated on large value corporate credit during most of 1998-99. Most of the sanctions were to reputed corporate houses at the prime lending rate (PLR). Of late, there seems to be a change in the focus towards the mid-corporate and trade segments where it could charge an interest of PLR + 3 or 4 per cent. With the restoration of discretionary powers to the field officials, the bank expects to increase credit to these segments at higher rates.

14. The bank is not active in its treasury operations. The financial position of the bank precludes it from taking any significant risk. The bank is presently in the process of training its personnel in trading and has made a modest beginning in this area.

15. Due to lack of growth in credit, the non-interest income to average total assets was only 0.57 per cent as against the median of 3.32 per cent for profitable public sector banks.

16. Operating expenses to total income increased from 29 per cent in 1996-97 to 34 per cent in 1997-98 and further to 38 per cent in 1998-99. The cost income ratio for the bank works out to 117 per cent for 1997-98. This is way ahead of the industry levels. The expenses are not sustainable at current levels of business.

17. Out of total NPAs of Rs. 3,428 crore in 1997-98, Rs. 3,029 crore pertain to domestic operations. Domestic provisions amount to Rs. 1,100 crore. Non-priority sector accounts for 62 per cent of total NPAs. This includes advances disbursed during the early nineties in new areas such as real estate, films, hospitals and educational institutions. Though bulk of the NPAs is in the non-priority sector, more than 50 per cent of the recovery is from smaller priority sector accounts. Recovery in large value NPAs is poor. As a result of the poor recovery, NPAs have slipped into the doubtful category necessitating additional provisions; the efflux of time also makes them more difficult to recover.

18. The bank has a compromise policy for recovery of NPAs. Though the policy of the bank is to effect maximum recovery through compromise, it has not been able to achieve any significant recovery through this route. In fact, the number of compromise proposals put up to the head office has been on the decline over the last three years. Lack of clarity in the policy and delayed decisions at higher levels have contributed to this decline. Multiple layers in the sanctioning process, use of different formats at different levels and rejection of proposals without assigning any reason are some of the other reasons for the decline. The recently revised compromise policy is expected to provide better results.

19. There is a general perception in the bank that top management is not very keen to effect recovery. This has affected decision making at lower levels. The poor recovery of NPAs coupled with a very high slippage has crippled the earnings of the bank. The bank added fresh NPAs to the tune of Rs. 1,000 crore in the last three years.

20. The domestic net credit has been stagnant at around Rs. 7,000 crore during the three years ended March 1998 even as deposits grew steadily. As a consequence, the credit deposit ratio fell from 63 per cent in March 1996 to 49 per cent in March 1998. This was mainly due to centralisation of all lending decisions at the head office.

21. More than 70 per cent of the large-value large and medium industry accounts fall within the potentially weak category. The bank could experience very high NPA generation rate over the medium term unless account-specific remedial measures calling for significant organisational effort at all levels are taken. New asset creation process will have to be more stringent as the current risk profile of the portfolio does not allow for taking on any new high risk accounts.

22. The credit appraisal system captures the basic details but fails to capture risk-related aspects. Large value proposals pass through a number of tiers before reaching the sanctioning authority but there is no value addition at most of the tiers.

23. The bank has two branches in Colombo and one in Singapore which together have 543 employees. Total NPAs in international operations amounted to about Rs. 400 crore as on 31 March 1998. This is expected to increase by more than Rs. 200 crore during 1998-99. The provision for Singapore NPAs is expected to be Rs. 170 crore for 1998-99 and with this the branch is expected to post a net loss of about Rs. 140 crore as on 31 March 1999. The bank’s high cost of funds leads to an unfavourable client profile. The level of NPA is very high and has led to a low interest spread. The bank lacks the necessary treasury skills in a market with free capital flows.

24. An amount of Rs. 35 crore on account of ICDs given by the housing subsidiary is likely to devolve on the bank. Despite capital infusion, the net worth of the housing subsidiary will be negative in the foreseeable future owing to write-off of ICDs, interest accrued on ICDs and non-performing project loans.

25. In the case of the mutual fund subsidiary, the total liability towards all schemes stands at Rs. 123.67 crore. Of this, only Rs. 0.42 crore is expected to be met from profits. While Rs. 43.71 crore has already been paid by the bank (this has been treated as investments and not yet written off), the bank will have to pay a further amount of Rs. 79.54 crore during this financial year. The bank will have to fund the mutual fund to the extent of Rs. 75 crore towards schemes where indicative returns have been committed by the fund.

26. The merchant banking subsidiary has reported a loss of Rs. 40.27 crore for the half-year ended 30 September 1998 after providing Rs. 31.75 crore for NPAs. Provisional losses for 1998-99 are about Rs. 96 crore. This includes provisioning of Rs. 83 crore. Deposits will have to be repaid to the extent of Rs. 90 crore. This would entail a severe strain on the cash flow.

27. As on 31 March 1999, the bank had 26,584 employees. This included 9,231 officers, 13,350 clerks and 4,003 sub-staff. It also has 543 employees in its three overseas branches. About 57 per cent of the employees are in the age group of 41 to 50.

28. The bank needs officers skilled in credit appraisal and monitoring, NPA recovery, risk management and treasury. While the bank’s training facilities for its employees are on par with industry standards, it does not have a systematic database to track the skills of its employees. The lack of an effective placement policy, which matches organisational requirements with individual skills and objectives, underscores the need for skill upgradation.

29. The bank has attained 29.08 per cent branch computerisation in March 1999 and has targeted to increase this to 58 per cent by March 2000 and 70 per cent by December 2000. The bank currently has 25 ATMs and the target is to have 75 ATMs by March 2000 and 125 by March 2001. The bank has installed 16 VSATs and this will increase to 30 by March 2000 and 60 by March 2001.

30. The bank’s problems can be summarised as follows:

a. The business efficiency factor

i. Lower yields on advances and investments.

ii. Higher cost of funds.

iii. Expenses disproportionate to income earning assets.

iv. No growth in fee income.

b. The structural factor

i. A huge NPA portfolio.

ii. Funding of losses by interest bearing funds. iii. Loss in subsidiaries. iv. Loss in overseas operations.

c. The organisation factor

i. Lack of direction in business strategy with regard to target customer segments.

ii. Non-upgradation of skills to match changing needs.

iii. Low morale and lack of will to take decisions.

31. The bank, in its projections provided to the sub-group, has covered only the period up to 2002. The bank’s projection is only up to the operating profit/ loss level and does not consider provisioning and net profit figures. The projection is only for domestic operation. It has not indicated any changes in the existing structure to attain the projection. While the bank feels that recapitalisation is needed to sustain customer confidence and attract good quality assets, it has not indicated the quantum/mode of recapitalisation required.

32. The bank expects some regulatory forbearance including reduction in CRR requirements to three per cent, favoured treatment for PSU and railway accounts, participation in State Bank of India/Financial Institution consortiums, higher allocation of food credit and favoured treatment for retailing of government securities.

33. The bank also expects to increase current and savings bank deposits from 32.87 to 36 per cent, extend working hours for cash transactions at totally computerised branches, mobilise deposits by extending consumer credit loans to professionals and others and extending telebanking facility and increasing ATMs.

34. For credit expansion, the bank proposes to focus on mid-sized trading borrowers, non-priority jewel loans, consumer credit loans and clean personal loans, build confidence at field level, relax pre-release audit without diluting safety of advance, reintroduce secured overdraft and review PLR to facilitate availing of limits in sanctioned accounts.

35. The bank expects to reduce NPA by delegating increased powers to field level functionaries including branch managers for compromise. Recovery monitoring cells will be put in place. Special monitoring officers for NPAs of Rs. 5 crore and above will be posted and recovery camps for small loans and rural credits held. All officers and staff in branches will be involved in the recovery process.

36. The bank estimates deposits to grow at 15 per cent, which appears optimistic. It expects credit to grow by 19.45 per cent and 18.70 per cent in the years 2000-01 and 2001-02 respectively. It also expects the yield on advances to be 14.50 per cent during the period. This is not supported by its past growth and inherent strengths and weaknesses. The bank’s lending rates are high and even if such a growth is realised, it will be extremely risky for the bank.

37. The bank’s estimation for fresh NPA generation and reduction in NPA are optimistic and not borne out by its past record. Its estimates in respect of growth in interest and non-interest income and non-salary non-interest expenditure are also optimistic.

38. Based on the sub-group’s assessment of the capabilities of the bank, the bank’s business plan was modified. The assumptions and outcome of the possible scenarios are summarised below:

Scenario	Assumptions	Present Value of	Comments
		Recapitalisation
		(Zero coupon bonds)
Case I	Business growth at 14%	No recapitalisation	Not a turnaround
	Employee expenses to grow
	at an average of 15%
Case II	Case I + Business growth	Rs. 2,855 crore	Not a turnaround
	at 16% (instead of 14%)
Case III	Case II + Partial wage freeze	Rs. 2,352 crore	Not a turnaround
	at 11% annual increase
Case IV	Case II + Wage freeze at 4%	Rs. 1,831 crore	Operating profits
	annual increase (to provide		in 2003 and net
	for DA)		profits in 2004
Case V	Case IV + Asset reconstruction	Rs. 1,933 crore	The best case
	company to take care of the		scenario.Difficult
	NPAs (70% of the NPAs		to achieve.
	transferred at 50% of their
	gross value)

39. The turnaround initiatives for the bank can be broadly classified into three areas: structural, organisational and business strategies. The structural issues would include infusion of capital, closing down of subsidiaries and international operations, reduction of staff through VRS and hiving off NPAs into an ARC. The organisational issues would include having a chief executive with a long tenure and a deputy CEO or ED with a clear indication that he would take over as the CEO. The organisational structure would also need to be revamped structure to manage business and risks effectively. The business issues will have to cover upgradation of risk management systems, identification of business areas to be focused on, improving credit appraisal and risk management skills and removal of fear psychosis and improving the morale of the employees.

Annex 5

Sub-group report on UCO Bank Executive Summary

1. UCO Bank has a four tier organisational structure; Head Office, Zonal and Regional Offices and 1,790 branches of which 65 per cent are in the rural and semi-urban centres.

2. The bank has sponsored 11 RRBs, three each in West Bengal and Bihar, two each in Rajasthan and Orissa, and one in Madhya Pradesh. The accumulated losses of these RRBs aggregated Rs. 233.11 crore as at the end of March 1998. As on 30 September 1998, the total paid-up capital of the 11 RRBs was Rs. 10.87 crore of which UCO Bank contributed Rs. 3.85 crore.

3. UCO Bank has been continuously incurring losses since 1989-90.

Some major factors which have contributed to the weak financial position of the bank are detailed as follows:

· High level of NPAs causing reduction in interest income and increase in provisioning, thereby reducing profitability

· Excess staff resulting in high staff expenses

· Lack of succession planning in senior management

· Low staff morale coupled with restrictive trade practices

· Lack of new product delivery

· Low level of computerisation, absence of MIS and poor housekeeping

4. Several studies were conducted in the past by various consultants (ICRA appointed by RBI, NIBM and Batliboi) to suggest measures for turnaround of the bank. The major recommendations of ICRA were

a. Massive capital infusion of Rs. 375 crore.

b. Setting up of ARF for taking over NPA accounts aggregating Rs.

281 crore and recovery of NPAs through judiciously negotiated compromise, settlement and invocation of government guarantees.

c. Cost reduction through wage freeze and downsizing through VRS.

d. Improving business through deposit growth to bring it on par with that of leading banks and better credit delivery through revamping of credit appraisal systems.

e. Splitting the CMD’s post into that of a non-executive Chairman and a Managing Director and addressing the problem of inadequate senior management due to serious gaps in succession.

f. Cost reduction, winding up of overseas operations, improved customer service, housekeeping, rationalisation of branches, redeployment of excess manpower in deficit areas, recruiting professionals in merchant banking, MIS and strategic planning, etc.

5. Based on the recommendations of ICRA, the bank initiated measures for improving deposit mobilisation, recovery of NPAs, toning up of credit management system, improving housekeeping, etc. However, there were reservations on the strategy suggested on wage freeze, VRS and closure of overseas branches. Setting up of an ARF was not found to be feasible by the GOI/RBI.

6. At the instance of the Government, the bank drew up Strategic Revival Plan (SRP) covering the period 1997-98 to 1999-2000 for its turnaround. The restructuring plan aimed at achieving profitability targets in definitive time frames through improvement in key performance areas such as mobilisation of low cost deposits, credit management system, recovery of NPAs, house keeping and MIS, etc. The staff unions of the bank also signed an MOU assuring higher productivity and removal of restrictive practices.

7. The extent of success achieved under the SRP is far from significant.

Certain measures such as setting up of Settlement Advisory Committee and recovery cells for recovery of NPAs were implemented. However, the bank was unable to achieve the important objectives of earning profit and reducing losses by 1998-99. There was no perceptible improvement by way of qualitative credit expansion. Instead, the bank took the safer route of investment in government paper.

8. The MOU with the Unions had only a limited impact on the cost front with certain sacrifices such as reduction of overtime and giving up of certain allowances. The other measures of cost control such as rationalisation of a few existing branches, embargo on new branches, curtailment of major capital expenditure, etc., do not have any major impact and the cost revenue ratio of the bank continued to exceed 100 per cent even by March 1998. The only significant result has been the closure of its London branch and merger of its two branches in Singapore.

9. In a belated recognition of the need for action, the committee of the Board of the bank set up to monitor progress under the revival plan had recommended (i) downsizing of the staff strength through VRS (7000 staff to be reduced in a phased manner in 3 years), (ii) further capital infusion of Rs. 250 crore by the Government, (iii) Mobilisation of Tier II capital, (iv) Non-implementation of wage settlement and (v) Closure/merger of loss making branches. The recommendations have not been endorsed by the representatives of the staff. There has been no serious follow-up measures to implement the recommendations.

10. During 1997-98, the bank posted an operating profit of Rs. 15 crore which increased to Rs. 38 crore in 1998-99. The bank could reduce its net loss from Rs. 96 crore in 1997-98 to Rs. 68 crore in 1998-99. If the interest income on recapitalisation bonds is excluded the bank would have incurred operating loss of Rs. 91 crore in 1997-98 and Rs. 157 crore in 1998-99. As at the end of March 1999, the bank’s accumulated losses stood at Rs. 1,804 crore. The bank received capital infusion from the government aggregating Rs. 2,257 crore till 1998-99. The bank had CRAR of 9.63 per cent as on 31 March 1999.

11. Despite the bank’s presence in most of the top 100 deposit/ advances centres, the bank’s deposit growth was only about 11 per cent and that of advances at 1-3 per cent during the period from 1994-95 to 1996-97. Consequently the CD ratio declined from 47 per cent in 1994-95 to 39 per cent in 1997-98, while the investment/deposit ratio increased from 44 per cent in 1994-95 to 52 per cent in 1997-98. Growth in domestic deposits and advances picked up in 1997-98 at 17 and 16 per cent respectively. However, the cost of deposits remained high at 8.5 percent. The deposit profile reveals that the eastern sector accounts for 39 per cent of the deposits.

12. The bank’s market share in advances declined considerably from 3.9 per cent in 1993-94 to 1.6 per cent in 1998-1999. Credit to priority sector and industry (medium and large) constitutes 37 and 35 per cent of the advance portfolio respectively. The highest share of the advance portfolio is in West Bengal and Maharashtra Zones. The bank’s increasing exposure to the steel and iron sector may be a cause for concern considering the poor situation of the industry. The credit management suffers from the following deficiencies resulting in high level of NPAs which aggregated Rs. 1,716 crore (23 per cent of gross advances) as at the end of March 1999.

• Delay in decision making due to four tier structural set-up.
• Lack of credit appraisal skills.
• Poor review and follow up.

13. The Zone-wise break-up of NPAs indicates the highest level of NPAs in West Bengal (Rs. 393 crore) followed by Maharashtra (Rs. 180 crore) and Southern Zone (Rs. 142 crore). The NPA slippage ratio was 6 per cent in 1998. The cumulative provisions constituted 41 per cent of the total NPAs as on 31 March 1999. Majority of the NPAs is in the doubtful/loss category. The SSI and agricultural category account for a major portion of NPAs. The recovery of NPAs has been tardy as bulk of NPAs is in the Rs. 25,000 to Rs. 25 lakh category with a large number of accounts. Cases filed with the Debt Recovery Tribunals amounted to Rs. 474 crore out of which the settlement was only Rs. 45 crore and the actual recovery, Rs. 14 crore. As at the end of March 1998, outstanding amount under government guaranteed accounts aggregated Rs. 90 crore. The bank is resorting to compromise for accelerating recovery of NPAs. Since July 1998, quarterly reporting of fresh generation of NPAs from each branch has been implemented. A scheme for awarding trophies to the best performing zones besides issuance of letters of reprimand to those officials who have exceeded 3 per cent level in fresh generation of NPAs has been introduced.

14. The investment portfolio of the bank comprises of high proportion of SLR and government securities, which have a relatively low yield. The bank’s secondary operations are not very significant as indicated in the low profit on sale of investments. There has been an increase in investments in PSU bonds and corporate debentures. Lack of clear focus, research and database and computerisation are the main constraints faced by the investment department. In the last three years, yield on investments improved marginally.

15. Loss making branches numbering 829 constituted 46 per cent of total branches. While the maximum number of loss making branches are in the rural areas (54 per cent), metro branches account for the highest quantum (36 per cent). West Bengal and Gujarat have the highest number of loss making branches. Under the prevalent Transfer Pricing mechanism adequate incentives have been given to both the deposit and advances oriented branches with adequate disincentives built in for non-performing assets. There has been a substantial reduction in the number of loss making branches primarily on account of change effected in the Transfer Pricing mechanism with effect from April 1997.

16. Internal control and house keeping in the bank leave much to be desired. There is no centralised MIS in the bank. Books in various branches were not balanced for a considerable period. Control of the Head Office was not exercised over the Zonal Offices and Regional Offices as the various returns which were required to be submitted were not done in time and even when they were submitted, were incomplete and incorrect at times. There was inadequate follow-up from the Head Office to ensure timely submission as well. There were 23,874 unreconciled inter branch entries as on 31 March 1998 aggregating Rs. 217 crore. There were 13,627 unadjusted entries in clearing difference account aggregating Rs. 24 crore as on 31 March 1998. Further there were 40 branches where the books were not balanced even with crystallised difference for as many as three years as on 31 March 1998.

17. The bank has four overseas branches, two each in Singapore and Hong Kong. The bank’s London branch, which was making losses, was closed in 1998. Overseas branches earned a net profit of Rs. 22.61 crore during 1998-99. During 1998-99, an amount of Rs. 44 crore was remitted on account of loss incurred in closure of the London branch.

18. In the past, vacancies in the top managerial posts were unfilled for long duration. The age profile of the staff is adverse with 11 per cent of the staff above 55 years and 50 per cent of officers above 50 years. A second rung of officers needs to be developed to avert a succession crisis.

19. An analysis of profitability shows that income on investments contributes 48 per cent while the share of income on advances is lesser at 34 per cent. The contribution of fee based income to total income is not very significant at 5 per cent.

20. The bank has recently undertaken a restructuring exercise, which envisages a three-tier organisational structure by closure of the Zonal/ Regional Offices and establishment of five Local Head Offices to oversee the operations of about ten regions. Other measures taken by the bank are detailed under:

• Creation of post of General Manager (operations) to oversee the functioning of branches and large credit proposals to be sent to Head Office directly to quicken the process of decision making.
• Formation of Asset Liability Management Committee and MIS department.
• Focus on mid-market segment.
• Recovery of NPAs through recovery camps and compromise.
• Closure/merger of 34 loss making branches.
• Increased computerisation.
• Instilling confidence and reducing fear psychosis in the staff to take informed credit decisions.

21. The sub-group noted that the projected business plan envisaged net profit of Rs. 19 crore to be generated in the year 2001 which is expected to grow in the subsequent years up to 2004. The bank assumes capital infusion aggregating Rs. 2,614 crore to maintain minimum CAR of 9 per cent in 2000 and 10 per cent thereafter. The bank is not likely to record current median levels of minimum competitive efficiency even by 2003. It is pertinent to remember that by then, the efficiency parameters of the remaining public sector banks would have moved up further considerably.

22. The sub-group assessed the revised business plan targets consistent with the capability of the bank based on the data available on its past record and the industry scenario. The projected growth in deposits (15%) was reasonable while that of credit (22-24%) was optimistic. Consequently, the assumptions behind the higher Net Interest Margin or growth in non-interest income of about 19 per cent (as against industry average of 12.7 per cent) were not realistic. The bank was also unlikely to reach projected levels of yield on investment (with the planned shift to credit portfolio and the future movements in interest rates. Likewise, the rapid reduction of NPAs to 5 per cent by year 2004 was out of line with the current levels of recovery performance. It was, clear that the business plan as projected by the bank would not be feasible even after the moderation factored in by the bank on account of the limitations of the bank to bring down the level of NPAs and to increase the advances while ensuring quality to comply with the proposed projection of NPAs.

23. The sub-group accordingly, drew up modified plans in three different scenarios. The scenarios involved estimating different growth levels in business parameters such as advances, deposits, return on investments, non-interest income as well as expected level of NPAs. The scenarios involved gradual reduction in the staff cost to industry level as well as bringing it down at one stroke. The estimate of the additional capital infusion requirement from the government would vary between Rs. 600 and Rs. 1,800 crore under the three different scenarios. After taking into account the likely shortfalls in attainment of targets, the sub-group observed that under all scenarios, the bank would require a minimum of four years to reach a reasonable level of net profit. An earlier turn around is, however, feasible if reduction of staff cost is attempted in one stroke to come to the level of industry median.