Coming Full Circle: Leadership and Governance at Indian Bank PART A The buzz words of today, like Risk

Management practices, Corporate Governance practices, Stakeholders Value Enhancement and NPAs were unheard of in those heady days of the postnationalization era. - Charting the Future-A History of Indian Bank 1982-2007 The second week of February 2007 ended on a celebratory note for K.C. Chakrabarty, the Chairman and Managing Director and others at Indian Bank. The public sector bank in its centenary year went public with an issue of 85.95 million equity shares with 10% of the issue being reserved for eligible employees. The issue with a face value of INR 10 each and an issue price of INR. 91 per share for cash brought in about INR. 7.82 billion. The Initial Public Offer (IPO) was subscribed 32.1 times over and received a tremendous response from the Foreign Institutional Investors. The process for getting the issue listed at National Stock Exchange and Bombay Stock Exchange was on. Ranjana Kumar (Kumar) in her current position as the Vigilance Commissioner in the Central Vigilance Commission, while penning her story of Indian Bank went down the memory lane to recall her stint as the Chairperson of Indian Bank during its most trying times The day was a Friday during the last week of June 2000. The entire staff of Indian Bank at its headquarters in Chennai, India was assembled on the ground floor and was waiting for their new chairperson with mixed feelings. Indian Bank in the past five years was in news for the wrong reasons. Kumar opined: The Government as the sole owner was determined to bring about a change in the management to regain the confidence of the customers and the employees alike. It was in this dismal scenario that Ranjana Kumar, who in her previous assignment had worked as the Executive Director holding concurrent charge as the Chairman and Managing Director (CMD) of Canara Bank, was to take up the post which was shunned by all, and endeavor to put the bank back on its feet. Indian Banking Sector and Reforms: The Indian Banking sector has a history embedded in the British rule. Apart from the private banks that were set up mainly by industrialists to fund their business ventures, three presidency banks; Bank of Bengal (1806), Bank of Bombay (1840) and Bank of Madras (1843) were set up in the cities of Kolkata (then Calcutta), Mumbai (then Bombay), and Chennai (then Madras). These three were amalgamated to form the Imperial Bank on January 21, 1921 and in the absence of a central banking institution until 1935, also performed several activities of a central bank. In 1955, the Reserve Bank of India (RBI) with a bid to nationalize it, acquired a controlling interest in the Imperial Bank and changed its name to State Bank of India (SBI). To this day it is the biggest bank with regard to size and deposits. In 1969, the Government under the Prime Ministership of Indira Gandhi nationalized 14 major scheduled commercial banks having deposits over INR. 500 million to serve better the needs of the development of the economy in conformity with the national policy objectives which brought forth severe criticism from 1

opposition political parties particularly with regard to the compensation paid. The second phase of nationalization took place in 1980 when seven more banks with deposits exceeding INR.2 billion were brought under the ambit of the Government with the intention of giving the government more control of credit delivery. With this, by early 1990s, the Public Sector Banks (PSB) had a 90% share in the countrys banking business. By March 1992, all PSBs together had a total deposit of INR 1,100 billion and advances of INR. 667.7 billion. The reforms in the banking sector took place during 1991primarily due to two reasons: one, to fall in line with the global banking practices and two, to rectify the faulty balance of payments the country was facing. There were other reasons too which contributed to this state of affairs: the administered interest rates, the pre-emption of funds by the banks to fund the government deficit, the excessive regulation which hindered innovation and simultaneously lack of sufficient regulation in prudential norms as well as a poorly developed debt and money market. The reforms could be grouped into three divisions: liberalization measures, regulation and monitoring and legal reforms. The immediate reaction to the depletion of foreign exchange reserves which dipped down dangerously low to a level just sufficient for one month forced India to sell 67 tons of gold to International Monetary Fund as a bailout strategy and bring in the promised economic reforms in the form of opening up the economy for international trade and investments, initiation of privatization, tax reforms and take measures to control inflation. Apart from the gold sale, the reforms included sequencing of interest rate deregulation which continues to be so except for Non-Resident Indian (NRI) accounts, Savings Bank accounts and export credit among others. The banks adopted a phased implementation of income recognition, asset classification and provisioning of Non-performing Assets (NPA). The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) were brought down to reduce the preemption of bank credit. The government helped in recapitalization and widened the capital base by including private participation in its equity. The immediate visible impact of the introduction of the reforms was the fall in profitability and increase in NPA to the tune of INR. 392.5 billion. To increase banks efficiency and productivity, competition was introduced in the form of entry of private players including foreign banks which though, had to follow the norms laid down by the Government. To have better supervision of commercial banks, Non-Banking Financial Institutions (NBFI), Development Finance Institutions and Co-operative banks, a Board for Financial Supervision (BFS) was constituted comprising members of RBI to provide direction on governance issues and practices. History of the Indian Bank Indian Bank was founded in 1907 with a meager paid up capital of INR.0.8 million as an answer to the insolvency of the Arbuthnot Bank and commenced operations on August 15, 1907. The first directors of the bank, Lord Govind Doss, R.M.M.S.T. Chidambaram Chettiar, Dewan Bahadur S.R.M. Ramaswamy Chettiar, T. Seetharama Chetty and Md. Abdual Azeez Badshah Saheb among others were eminent members of their own professions. It was headquartered in Chennai with a single branch and grew to be one of the strongest banks in the country with a strong hold in Tamil Nadu in Southern India and with 282 branches at the time of nationalization. The overseas ventures of the bank had its share of success and pitfalls. With increasing trading interests of the business community in Tamil Nadu as well as the growing Tamil migrants, the bank opened branches in Malaysia, Sri Lanka (then Ceylon), Singapore and Myanmar (then Burma). World War II and nationalization by the Burmese Government saw the closure of some of these branches. Its nationalization along with 13 other banks in 1969 changed the course of its banking from class 2

banking to mass banking and was later identified to be a lead banker for economic and social change. But it suffered a setback in the form of closure of three of its branches in Malaysia as it was considered a foreign government agency. The business was transferred to a new Malaysian Bank and along with Indian Overseas Bank and United Commercial Bank held 33.33 % of the capital. After 1972 Indian Bank was left with only two foreign branches, one each in Colombo and Singapore. With the implementation of the then Prime Minister Indira Gandhis 20- point program, assistance was granted to various sectors including cottage and village industries which were considered to be the forte of cooperative banks. The bank had initially chosen to be conservative in its growth which was its hallmark for many decades. This strategy worked well until late 1980s when Indian economic scenario changed and Indian Bank kept its pace and crossed the INR.10 billion mark in credit in 1983. 40Rural Development Centres were set up all over the country to hasten the flow of credit to the rural community. Within a year, the global deposits crossed INR. 20 billion and the number of branches exceeded 1,000. With the appointment of a new chairman in 1988, several new initiatives were launched which included upgrading technology, installation of ATMs, amalgamation with Bank of Thanjavur, Kisan Gold Card Scheme for providing cash credit to farmers and AGRIGEMS, a self-employment scheme for agricultural graduates. The introduction of the Basel Accord also known as Basel I focused primarily on credit risk. It insisted on capital adequacy, income recognition, classification of assets and provisioning for non-performing assets among others. The assets of banks were classified into five categories according to the risk and carried risk weights from zero to 100. Banks with international presence were required to hold capital equal to 8% of their risk-weighted assets. Together with the introduction of the first phase of economic reforms, it brought in further challenges in the form of higher NPAs and leaner balance sheets. What went wrong? By 1995-96, most of the banks had rejuvenated after adapting to new norms but it was a dismal state that Indian Bank found itself in along with UCO Bank and United Bank of India. The Working Group on Reconstruction of Weak Public Sector Banks also known as M.S. Verma Committee had requested the Chairman and Managing Directors of the three banks to pinpoint the underlying causes of their respective banks weaknesses and its inability to achieve a viable turnaround despite several strategic revival plans. The committee had given its report and its recommendations which included managing costs, changes in internal governance and effective monitoring among several others. The strong recommendation of Management Advisory Group (MAG) constituted in latter half of 1999 under the chairmanship of Deepak Parekh, Chairman HDFC and other distinguished members which included S.D. Kulkarni, former Managing Director and CEO, Larsen and Turbo Ltd., Ram K. Gupta, former Managing Director and CEO, State Bank of Patiala and Dileep Chokshi, Chartered Accountant was taken heed and a serious exercise of a restructuring was decided. Indian Banks operations were mainly concentrated in Tamil Nadu, southern India though there were offices in metros of Mumbai and Delhi too. Until the nationalization, the founder promoters who had set up the bank primarily to fund their own businesses were cautious in their approach. The bank retained a strong flavor of the bygone feudal system. Further, the culture of the local people was reflected in the culture of the bank too. Kumar opines: The employees felt that professional discussions and debates were not encouraged. They also felt the compulsion to be submissive to their superiors and fell in line with their decisions to the extent that they 3

shied away from pointing out any errors in judgment made by their bosses. This resulted in the total lack of professionalism. The decay of Indian Bank, once considered as one of the strongest banks in the country did not happen overnight but over eight years or so. The loopholes in the system were first revealed with the change in the banking regulations by the RBI in 1992. Although the entire banking system suffered and had to readjust their balance sheet with assets at their fair market value, Indian Bank reeled under them and in 1995-96 was declared as one of the three weakest banks in the country with its cumulative losses which exceeded its capital and reserves. Though RBI did not permit banks to lend more than 60% of their deposits after provisioning for SLR as well as the cash in the tills, Indian Bank had spread itself thin by having an incremental credit ratio ranging between 72.02% and 83.5%. This shortfall was filled in from inter-bank call money market on day-to-day basis at a high rate of interest to fund long term loans. Credit was being extended indiscriminately to sectors like real estate, which were not considered safe. The aggressive banking followed was to ensure that Indian Bank remained at the top of the list of banks. Such strategy earned short term popularity and was the work of a few self-centric individuals and not the result of a team approach or even the banks strategy. The introduction of prudential norms brought to the fore the low quality of the credit and the actual amount of NPAs which were extremely high. The mystery of the declaration of a profit of INR.142.6 million in 1994-95 after posting a loss of INR.3.90 billion during the previous year was soon revealed by an RBI inspection which showed a under-provisioning of assets which in reality resulted in a net loss of INR.28.388 billion. The ultimate shock was the gigantic loss of INR.13.36 billion in 1995-96 which was considered as the last straw on the camels back and effectively wiped out the networthofthebank. S. Rajagopal, former Chairman and Managing Director: During the previous year1994-95, the loss would have been less but for the impact of reduction in income to the tune of INR 1.1399 billion and increase in operating expenses by INR 4.632 million. Indian Bank had received recapitalization funds to the tune of INR 17.50 billion and was expecting a further dose of INR 4.00 billion. He added that the full impact of capital infusion would be reflected in the financial results for 1998-99. The banks accumulated losses at the end of the decade ending 1990s were to the tune of INR. 7.78 billion after provisioning for NPAs to the extent of INR.5.30 billion. During the same year, there was an operating loss of INR. 1.63 billion, due to the fact that the bank had recognized an income of INR.1.60 billion from recapitalization of bonds. The main reason for the negative networth was the massive NPAs of INR.35.58 billion which amounted to 44% of its advances, unheard of in any banking institution. Despite infusion of funds from Government of India (GoI) to the tune of INR.18.50 billion, it still had a negative Capital Adequacy Ratio (CAR) of 8%. The high rate of Prime Lending Rate (PLR) also resulted in the prime accounts moving away to other sources of funds. Verma Committee observed: Prolonged slowdown in business, adverse comparison with stronger banks and high NPAs has affected 4

the morale and motivation of employees at all levels. This and the fear of accountability for bad loans have almost killed every initiative for doing fresh business. The MAG suggested three options; closure, merger with another bank or restructuring. The closure was not considered a wise decision for it involved a plethora of issues like the employees, customers and the banks reputation. Merger with a stronger bank was not viable in turbulent times as several other banks had also gone through a rough patch after the reforms and the merger would harm them as it was in the not-so-successful experience of a forced merger of New Bank of India with Punjab National Bank. The only option left was to revive the bank since it carried good brand equity and owned sufficient infrastructure. Reflecting upon the matter, there were several operational issues led to the huge NPAs. The main reason could be traced back to the indiscriminate growth of credit. Sanction of credit facilities was done on adhoc basis. For the three years between1989 and 1992, the deposits of the bank grew by INR. 33.46 billion, while the credit during the same period increased by INR. 27.97billion. Kumar said: Certain officials situated in metropolitan cities purportedly sanctioned loans which were several times higher than the limit prescribed to them and is alleged to have been done at the behest of the then CMD. Although the Board consisted of eminent people including a renowned economist (Exhibit 5a), credit appraisals made by certain officials were alleged to be defective. The Banking Regulation Act 1949 prevented connected lending i.e., lending by banks to directors or companies in which the directors are interested, which the bank ignored. These officials who were later found guilty by the Central Bureau of Investigation (CBI) of fraudulent actions, permitted/sanctioned huge withdrawals in the Open Cash Credit Limit and Letters of Credit Limit over and above the limit permitted for their posts. While sanctioning loans to customers, the Key Cash Credit and the Open Cash Credit were merged and thereby the bank lost its hold on the loans sanctioned. To add further fuel to fire, the bank did not examine the end use of the funds since its monitoring mechanism was weak. The CBI found the collaterals offered by the borrowers were not as per the banking norms and did not cover the loans adequately and the Current Ratio of the customers was unsatisfactory. In certain cases, the assets attached by the bank were very difficult to sell due to the sluggish economic conditions which further added to the problems. Further, overdraft facilities were said to be permitted by those same officials who issued bid bond guarantees without obtaining any proposal in the Banks format but only on oral instructions from the bank. CBI investigations also revealed that the overdraft facilities was supposedly sanctioned overlooking all norms and procedures of banking and by presenting forged and fabricated documents for the purpose of developing a residentialcum-office complex at Guindy, Chennai. Inordinate delay in taking decisions on the final disposal of NPA accounts added to the erosion of the asset values, especially the stocks and equipment. The internal and statutory auditors reports to the Government allegedly did not cover in detail any major deviations and were done only superficially. On the contrary, the activities were certified as justified. The diversions made in lending which should have been reported through Monthly Audit Statement were not done so. Further, records connected with Inter-Corporate Deposit (ICD) transactions were purported to be correct under Companies Act 1956. The governance issues PSBs in India though established under a separate statute are primarily owned by the Government through equity as well as debt. The Government also plays the role of the regulator. Since the multiple roles of owner, creditor and regulator were initially played by the government, it did not deem it necessary in differentiating the executive and non-executive roles. But over time, the dual posts have created agencies 5

issues very peculiar to the PSBs only. For instance, all nationalized banks were originally founded by business houses to facilitate their ventures. The stake of the founder promoters initially used to be high and the inclination for greater power for decision making was justified. So was the case with Indian Bank. It had the image of a refinancing agency, lending money to a particular business community who were its intermediaries with a fairly low ratio of investments to its deposits. Despite nationalization, the Board characteristics did not undergo any major changes and continued to be the same till the year 2000. All public sector banks in India with the exception of SBI have the posts of the Chairman and Managing Director combined into one. A chairmans role in a corporate firm is that of a visi onary, to provide direction and guidance to the top management in an unbiased manner in implementing strategic decisions, while the managing director is one who is a whole time employee responsible for strategy formulation and its implementation. The Board of Indian Bank consisted of directors; executive and nominee. While the executive directors were whole time employees of the bank, the Government and the RBI appointed their own representatives as nominee directors on the Board whose primary duty was to monitor and manage risk and oversight of the activities to protect public funds. The Government being the sole owner of the bank effectively made the authority of both the executive and the nominee director employeestobeatpar,althoughtheywereworkingunderdifferentstatutes. TheGovernmentofIndiahadissuedGuidelinesontheroleandfunctionsofNonofficialDirectorsontheBoardofNationalisedBanks(Guidelines)in1989whichwere fairlyexhaustive. Theyincludedtheroleofthe directors,thebroadpoliciesofthegovernmentwith regardtodepositmobilization,sectoralcreditallocationetc.,includingabriefdescriptionoftheroleoftheCMDvis-vistheBoard. The internal auditors of the bank were employees like any other, appointed by the bank who reported to the chief of finance function. Though their role required professional qualifications, the internal audit department had acquired a reputation of being inefficient and ineffective where employees were transferred either as a punitive measure or when the employees themselves wished to escape transfers to less convenient places. They failed to raise any objection to the method of classification of loan accounts or the provisioning of bad and doubtful debts and did not report the discrepancies in their mandatory report. The statutory auditors who were appointed by the RBI failed in their fiduciary duty to report the lapses on the part of the CMD due to his strong political connections. Their laxity resulted in the banks financial statements projecting a picture which was neither true nor fair. Their statements were taken as valid by the government, RBI, the customers and the general public. The system of Annual Financial Inspection was introduced in 1992 to evaluate the banks safety and soundness, to appraise the quality of the members of the Board and management, to ensure compliance with banking laws and regulation and to provide an appraisal of soundness of the banks assets. It was also to analyze the financial factors which determined the banks solvency and identi fy areas where corrective actions were needed to strengthen and improve performance. But it failed to take any corrective measures which led to the erosion of networth. RBI being the supreme regulator had served notices to the bank to comply with the prudential norms for lending funds but Indian Bank chose to ignore them. Despite open defiance by the bank, RBI did not advocate any punitive action against it. The Government, at a subsequent date, in an effort to undo the damage, mandated narrow banking and completely froze credit during the tenure of the succeeding chairman. Just as in all other public sector banks, whistle blowing mechanism and succession planning were absent in Indian Bank too. The policy for selection of the CMD was made by the Selection Board on the basis of 6

seniority of service. The Government policy required that a CEO/CMD should mandatorily have a minimum of two years of service before superannuation. The tenure of each CEO/CMD though officially for a maximum period of 5 years or 60 years of age whichever was less, was in reality restricted to 2-3 years. The senior- most executive was chosen unless the service record of the said person proved to be detrimental for the post. M.S. Verma Committee in their report observed: Short tenures and frequent changes at Executive Director (ED) /CMD levels have added to the above problem. There have also been instances, when top management posts have remained vacant for considerable lengths of time. Short tenures and frequent changes lead to the adoption by the management of a tentative approach towards serious issues and lack of long term strategic planning. Guidance and support received by the bank from the Board of Directors was less than adequate. The Board was not broad-based enough to include sufficient number of experts from areas related to banking, finance and management and has not always been able to provide the kind of support and guidance that is needed in a critical situation. Stepping away from the well laid regulations, the CMD received no less than seven extensions ranging from three months to one year. The former Cabinet Secretary under whom the first two extensions are alleged to have been given to the CMD said: The proposal for granting an extension had emanated from the Ministry of Finance. Change Management at Indian Bank Kumars foremost responsibility was to pick up the pieces of the banks reputation and begin from scratch. The restructuring plan 2000-03 was finalized. The bank needed a new Board. She had to her advantage a team of employees at every level who were efficient but whose confidence lay in shreds due to constant rumours of merger with another bank and of retrenchment of personnel beyond a certain age. Instilling faith and cajoling them to do better was a herculean task for her but none the less vital. In response to the Governments offer to transfer executives from other banks to assist in restructuring, Ranjana Kumar chose four executives from Bank of India and Canara Bank who were not only experts in their field but could also adapt themselves to a changed situation to take care of the Restructuring, Recovery Mechanisms, Monitoring of Assets and Investments. To instill faith in the employees, the existing team was empowered to put the bank back in circulation. Several meetings with the Government and RBI officials later, with tottering steps Indian Bank found itself making changes and finally saw daylight at the end of the tunnel when 2001 marked the era of No turnback and the bank grew stea dily with a reported profit of INR.3.32 million a year ahead of their expectation which transmitted a positive signal not only to the employees but also to all stakeholders. Kumar said: We could have shown a rosier picture with higher profits but we bel ieved in being conservative while reporting to ensure that there would be no slide back in the Banks position in the near future. The resurrection of Indian Bank was attributed to the changes brought forth both at the Board and operational levels. The Government modified the Board structure to include representation from other stakeholders. Distinguished bankers as nominees, one each by the RBI and Government were appointed apart from an executive director as done before. But the board transformation lay in the appointment of six eminent members with expertise in different fields as non-official directors to steer the company. 7

During the restructuring, the Banks board consisted of very distinguished persons from State Bank of India, Indian Institute of Technology and Central Bureau of Investigation. After the IPO in 2007, a member each from the executive employee group and workmen were selected to be on the Board as well as representatives of the shareholders. Further, to strengthen the board, two Executive Directors in lieu of one as done previously were appointed. The Government also constituted an Audit Committee which was independent of the management and reported to the Board as a whole. Apart from that, a Head Office Audit Committee was constituted headed by the Chairman and included the Executive Directors, General Managers and Deputy General Managers, where all the audit observations and irregularities were brought to their notice. The executives provided inputs to understand better the working of a bank/branch and its performance. Internal auditors too had been empowered to report their findings to the Audit Committee directly, without reporting it first to the management. On the operational front the four-tier structure consisting of the head office, zonal offices, the regional offices and the branches was changed to a three-tier structure with the head office, circles and branches. This de-layering helped in effective communication and quick decision making while doing away with hierarchy. The monitoring system was overhauled and even the standard assets were monitored on a continuous basis with regard to the drawing limits, overdues and excesses. The stressed assets were categorized a A, B or C depending upon the nature of overdues and irregularities. Monthly meetings were conducted by the Chairman and top management to discuss new businesses, RBI visits, plan training programs, identify areas of concern and find solutions for them. No new recruitment had taken place for nearly a decade and the average age of the bank employees in 1999 was 47 years. A Voluntary Retirement Scheme answered the problem of reducing the excess manpower in areas which were merged upon restructuring and a novel idea was introduced by engaging MBA student interns for short durations to help bring in a new and fresh perspective about banking among the customers and general public. Fast track promotions ensured that several employees who were denied their rightful place earlier got their due which boosted their morale. But keeping in mind the long term benefits, employees at all levels were deputed for training and retraining to their Apex Training Institute as well to SBI Training Institute. To bring in new customers and to bring back the old ones, the bank decided on an aggressive strategy to provide attractive home loans and emphasis was laid on the agriculture and core sectors like steel and cement. To achieve their targets, the officers en masse went campaigning on weekends and holidays. External factors like lowering of interest rates, steady growth in core sectors and buoyancy in stock market aided in its growth. The bank was able to accomplish all of the above targets in the shortest possible duration during the tenure of Ranjana Kumar and successors M.B.N. Rao and K.C. Chakrabarty. Over the years the bank received a total of INR.24 billion in the form of recapitalization which led to a steady growth in the interest income, non- interest income, business mix in a period less than 24 months from the date of restructuring. The Government, RBI, the customers and more importantly 26,000 employees had their eyes trained on the banks operations. Ranjana Kumar pondered if anything more or different could have been done at Indian Bank during her tenure.

Exhibit 1 Financial Ratios

Sl.No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Particulars Operating Ratios Returnon Advances ReturnonInvestments Costs of Deposits ReturnonAverageWorking Funds Cost ofAverage Working Funds Efficiencyand Productivity Ratios Cost-Income Ratio Business per Employee(in Millions) Net profit peremployee(in Millions) Probability Ratios Net Interest Margin(%) ReturnonAverageAssets Capital CRAR (%) Basel-I Basel-II Net worth Returnon Equity Earnings per share Rs Book valueRs

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 6.52 6.47 5.67 8.59 6.87 96.36 10.94 9.28 11.1 7.73 8.77 6.75 92.35 13.84 9.45 10.83 7.28 8.6 6.63 70.27 15.87 0.015 2.25 0.14 1.7 9.09 9.82 6.42 8.29 5.66 56.13 17.89 0.085 2.95 0.65 10.85 8.83 9.21 5.41 7.93 4.61 56.96 20.45 0.185 3.65 1.21 12.82 17077 32.15 8.83 8.36 4.73 7.22 4.01 55.17 22.73 0.187 3.49 1.08 14.14 21062 24.36 54.1 430 8.66 8.29 4.76 7.6 4.27 54.72 29.47 0.236 3.46 1.16 13.19 22677 24.43 142.4 543.2 9.6 7.76 5.15 8.07 4.64 47.85 36.42 0.364 3.57 1.46 14.14 36213 27.7 204.6 749.5

Negative Negative

Negative Negative -11.64 7146.5 -13.6 -9931.4

3355.8 12872.5 -5.79 33.08

Exhibit- 2a Comparison of Indian Bank with other Public Sector Banks * Indian Bank `RsinMillions 1996-97 InterestIncome 15630.00 InterestExpenses 14420.20 OperatingExpenses 4770.00 NetProfit -3890.00 NetNPA 17350.00 CRAR -18.81 Indian Bank `Rs in Millions InterestIncome InterestExpenses OperatingExpenses NetProfit NetNPA CRAR 2000-01 21064.90 16112.90 7436.00 -2704.10 9490.60 Negative Indian Bank 1997-98 14642.00 13529.00 5230.00 -3015.00 18890.00 1.42 Indian Bank 2001-02 22940.00 17628.00 7258.00 332.20 9040.00 1.70 12.25 Indian Bank 1998-99 16252.00 14280.00 5590.00 -7785.00 16250.00 -8.94 Indian Bank 2002-03 25319.00 17115.00 7551.00 1888.00 7549.00 10.85 12.66 Indian Bank 1999-00 18986.00 15187.00 6312.00 -4270.00 13270.00 -11.64 Indian Bank 2003-04 26669.00 15498.60 10619.00 4057.00 3832.10 12.82

Sl.No

PSB 1996-97 11904.00 12378.00 6339.80 53.28 33260.00 7.99 PSB 2000-01 29988.00 20415.00 37337.00 1102.63 5542.40 9.98

PSB 1997-98 13087.00 13826.00 848630.00 79.84 36840.00 8.67 PSB 2001-02 61979.00 42597.00 41540.00 2555.42

PSB 1998-99 16466.00 16240.00 9583.90 49.53 44260.00 9.80 PSB 2002-03 66368.00 42645.00 49228.00 4096.82

PSB 1999-00 24374.00 18672.00 11792.20 67.52 26050.00 9.46 PSB 2003-04 36073.58 21247.00 57069.00 5751.39 9151.05 13.18

1 2 3 4 5 6

Sl.No

1 2 3 4 5 6

*Average of 19 Public Sector Banks Source: RBI Reports, Capitaline, Prowess Database and Indian Bank Annual Reports

10

Sl.No 1 2 3 4 5 6 `RsinMillions InterestIncome InterestExpenses OperatingExpenses NetProfit NetNPA CRAR

IndianBank PSB 2004-05 2004-05 28735.6 38136.49 15648.7 21739.32 9144.02 4084.85 11917.8 14.14 33948.29 4978.584 5101.684

IndianBank PSB 2005-06 2005-06 33645.1 43784.18 18543.3 24852.43 10797.6 5161.9 971.5 13.19 37606.32 5274.368 4173.347 8.93

IndianBank 2006-07 42008.1 24096.2 12526.8 8174.7 942.5 14.14

PSB 2006-07 55092.58 33508.37 13941.68 6815.684 4338.816

*Average of 19 Public Sector Banks Source: RBI Reports, Capitaline, Prowess Database and Indian Bank Annual Reports

11

Indian Bank- PSB average-SBI Comparison Exhibit 3 a-Indian Bank Year 2000 2001 2002 2003 2004 2005 2006 2007 Source:Capitaline Gross Block 6282.4 6778.2 7011.9 7025.5 7308.4 7716.3 8919.8 9680 PBIT 10917.1 13379.5 17969.2 19090.6 19791.9 19983.5 24150.4 32968.3 PAT -4269.7 -2740 332.2 1888.3 4057.5 4084.8 5044.8 7597.7 Networth -7146.5 -9931.4 3355.9 12872.5 17077 21062.3 24914 38407.7

Exhibit 3b Industry Average Year 2000 2001 2002 2003 2004 2005 2006 2007 Source:Capitaline GrossBlock 5736.31 6283.67 6752.43 7338.76 8058.79 9165.02 10171.90 12747.09 PBIT 20528.95 22034.60 25838.43 28100.48 29549.50 27909.05 31540.05 42607.56 PAT 1308.69 1100.16 2464.07 4083.26 5737.56 4978.58 5273.79 6782.63 Networth 12112.70 13292.97 15866.69 19545.43 24666.97 30024.15 37374.58 44415.39

12

Exhibit 3 c SBI GROUP

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Capitaline

GrossBlock 6004.99 6762.79 719.00 800.49 962.11 1093.81 1287.44 1395.04 1572.95

PBIT 30097.43 33082.23 39864.88 42491.41 41831.24 41429.38 46491.25 53736.99 76887.91

PAT 3348.99 2777.31 4311.86 5638.79 7022.14 7093.59 7444.35 8213.81 11255.36

Networth 19399.41 21743.84 25069.79 28912.34 34682.90 40951.41 47071.41 53673.00 77128.69

Exhibit 4 ChairmanandManaging Directors Name Dr.Rajah Sir Muthiah Chettiar G.Lakshminarayanan M.V.Subba Rao M.G.K.Nair M.Gopalakrishnan S.Rajagopal T.S.Raghavan Ranjana Kumar M.B.N.Rao K.C.Chakrabarty

Sl.No. 1 2 3 4 5 6 7 8 9 10

Year 1964-68 1968-77 1977-82 1983-88 1988-95 1996-98 1998-2000 2000-03 2003-05 2005-

Source: Indian Bank Annual Reports

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Exhibit 5a Indian Bank Board of Directors (2000-2007) 2000-01 Name RanjanaKumar MB NRao A.Somasundaram D.K.Tyagi MP Radhakrishnan PV Maiya MD Sharma SNSatpute C.R. Muthukrishnan P.V.Indaresan Designation CH&MD Exec.Director RBINominee Govt.Nominee Non-Official Non-Official Non-Official Non-Official Non-Official Non-Official Name RanjanaKumar MB NRao RamMuivah SKarupaswamy C.R. Muthukrishnan MP Radhakrishnan PV Maiya P.V.Indaresan MD Sharma SNSatpute AshokGupta 2001-02 Designation CH&MD Exec.Director RBINominee Govt.Nominee Non-Official Non-Official Non-Official Non-Official Non-Official Non-Official Non-Official Name RanjanaKumar M.B.N.Rao Karupaswamy RamMuivah MPRadhakrishnan PV Maiya MD Sharma SNSatpute C.R. Muthukrishnan P.V.Indaresan AshokGupta 2002-03 Designation CH&MD Exec,Director RBINominee Govt. Nominee Non-Official Non-Official Non-Official Non-Official Non-Official Non-Official Non-Official Contd 2 0 Name Designation 0 MBNRao CH&MD 3 RamMuviah GovtNominee 0 4 RabiNMishra RBINominee AshokGupta WorkmenEmpl oyee Director

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Name MBNRao B Sambamurty Ram Muviah Rabi Mishra A George Ashok Gupta

2004-05 Designation CH&MD Exec.Director GovtNominee RBINominee Officeremployee Director Workmen Employee Director

Name K.CChakrabarty M.SSunderajan RamMuviah S.Karupaswamy AX George AshokGupta G.CharathChandran NafizaAliSodhi Ponuguleti Sudhakar Reddy

2005-06 Designation CH&MD Exec.Director GovtNominee RBINominee Officeremployee Director Workmen Employee Director Part-timeNon-official Director Non-officialDirector Non-officialDirector

Name K.CChakrabarty M.SSunderajan V.Senthil CR Gopalsundaram AX George AshokGupta G.CharathChandran NafizaAliSodhi Ponuguleti Sudhakar Reddy GSudhakar Rao

2006-07 Designation CH&MD Exec.Director GovtNominee RBINominee Officeremployee Director Workmen Employee Director Part-timeNon-official Director Non-officialDirector Non-officialDirector Part-timeNon-official Director

Source: Indian Bank Annual Reports

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Discussion Questions 1. 2. 3. 4. 5. Put yourself in the role of Ranjana Kumar, the newly appointed chairman of Indian Bank. What were the operational problems faced by Indian Bank which resulted in its bankruptcy? What role did governance play in this? Note the composition of the Board in the year 2000. What is the role of independent directors in the Board? Study carefully the changes initiated by Ranjana Kumar. In what ways have the changes advanced good governance at Indian Bank? Do you see any conspicuous omissions? Do you think the policy regime in India is sufficient to advance good governance? For example, in what way can Revised Clause 49 be made more effective in governing a Public Sector Undertaking?

Case Reading: 1. K.M.Birla Committee Report on Corporate Governance. 2. SEBIs Revised Clause 49 of the listing agreement. Suggested Reading 1. 2. 3. 4. 5. 6. Management Advisory Group Report 1999. OECD corporate governance working papers No.2. Basel norms I and II. Arvind Panagariya, India: An Emerging Giant, Oxford University Press, 2008. Y.V. Reddy: Corporate Governance in Banks in India, December 16, 2005. Ashok Thampy, Resurrecting a Bank: Key lessons from the turnaround of Indian Bank, IIMB Management Review, March 2004. 7. M.S.Verma Committee Report 8. http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?FromDate=10/04/99&SECID=21&S UBSECID=0

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