A T U R N A R O U N D S TO RY

Commercial Bank Management (B)

Group 8: Yash, Ritu, Bhartesh, Smriti, Rahul, Piyush & Jastej
Indian Banking Industry
History :
• 1969 - Nationalisation of banks resulted into dominance of public sector banks
• 1993-94 – Banking sector reforms increased the presence of private players rather then privatising the
ones owned by Govt.
• 1994 – Nine new private sector banks emerged; “IndusInd Bank” is one of them

Structure:
2007- 08 :
Non-Scheduled Public Sector
bank credits - 73%;
banks Banks
deposits – 74%
Banks in India
Scheduled Banks 2007- 08 :
Private Sector
(second schedule of RBI bank credits - 21%;
Act 1934) Banks
deposits – 20%

2007- 08 :
Foreign Banks bank credits - 6%;
deposits – 7%

1
IndusInd Bank:
Background
Inception of IndusInd Bank:
•
A Crisis:
IndusInd bank began operation in 1994; one of the nine
• Late 1990s - Indian Economy opened further to
private banks licenced after 1993 reforms
include foreign competition
• Set-up by Hinduja Group; first bank in India to be set-up by
• SMEs were effected and many of them were
NRIs
shut down
• Started off by focusing on mid-corporate and small and
• New private sector banks (including IndusInd
medium enterprises (SME) lending
bank) faced issues as they were catering to
- Retail banking requires substantial investment SMEs.
- Lending to large corporates required ability to lend large volumes
• The new private banks that failed were merged
at competitive costs
with other healthier banks
- Hence, loans to SMEs as it attracts higher yield that would
cover the higher costs of funds

The Solution:
• 2004 – Hinduja group decided to IndusInd merged with Ashok Leyland Finance (NBFC)
• IndusInd bank entered a new portfolio

2
Product Portfolio

1. Retail Banking 2. Wholesale Banking

• Deposits and Loans - personal and business • Corporate and Institutional Banking
• Financing of vehicles such as cars, commercial • Treasury and International operations catering to
vehicles, multi-utility vehicles etc. bank’s funding, asset liability management
• Wealth Management catering to HNIs and NRIs • Services for Capital and Commodity
• Distribution of MFs and insurance products • Investment Banking and Merchant Banking

3
ALF & IIB Merger

Ashok Leyland Finance (ALF) Post Merger Developments

Merger Details

Key Capabilities Key Changes

The merger led to a dilution of Hinduja Group’s
overall share which fell to 31.3% while the A Non-banking Finance Company (NBFC), ALF IIB noted that the benefits of the merger
Chennai-based manufacturer Ashok Leyland had key strengths in the area of automobile started flowing in which was evident form the
took a 15.6% share in IIB, reasoning being that loans where it had been highly successful increased number of branches which was
Ashok Leyland held 45% of ALF. One key specifically in the commercial vehicle financing coupled with a rise in disbursement of high-
issue during the merger approval was that dimension. yielding advances which was accompanied by
corporate holding was limited to 10% at that a decline in borrowings
point of time. Prospective Benefits to IIB Sale of Stake of AL
The share swap ratio which was approved by
the boards of IIB & ALF was 9:4. This merger
Post merger the prospective benefits that were Slowly, as the years progressed, Ashok
was seen as ideal for both as the overlap of
perceived for IndusInd Bank was a larger Leyland starting selling stake in IIB to adhere
products was minimal for both
portfolio of high-yielding vehicle loans. Apart to RBI’s guidelines. In 2006, Ashok Leyland
After the merger, the MD of Leyland Finance from this change, there was a creation of a sold approximately 2.5% stake which dropped
took charge as DMD at IndusInd Bank enormous retail portfolio which allowed for it’s holdings to around 10%
needed diversification for the merger entity.

4
Post Merger Performance &
Issues Increasing Bank Network and Cost of
Deposits
Cost of deposits increased affecting the credit
growth while the bank increased number of
Asset-Liability
branches which further increased operating
expenses and more pressure on risk Mismatch
management 85% of funding
Changes in RBI’s Interest Rate policy through bulk deposits

Post 2008 RBI increased the Repo rate.

Borrowing costs for IndusInd increased but the Decline in NIM
interest rates in terms of vehicle lending were Decreased from Corporate vs Retail rates
fixed over a period of time exposing huge 2.7% in 04-05 to The bank lent to the corporates at pre-
risks.. 1.9% in 05-06 negotiated rates while it had fixed card rates
for retail. Increase in repo rates meant a wider
RBI Amendment gap between accrued income-expense in
terms of interest
2006
Vehicle portfolio Income gets affected
PAT Decline in 2004
The proceeds of securitization could not be
counted as in the years in which it undertaken
and was to be amortized over a period of time .

5
IndusInd: Bank or NBFC?
The banks perception in the minds of general public was
not clear and Sobti felt it was holding the bank from its
intended growth objectives

Sobti and the board decided that the focus should be on

positioning IndusInd as a banking institution

The key challenge here was the integration of the NBFC

business into the banking institution as a business service
where managing the synergies and establishing it as a
whole banking unit was the bigger challenge

6
CASA-Capital Dilemma
IndusInd Bank had The Low cost
a high amount of A High CASA required Capital! CASA deposits can
bulk deposit be increased by
which were more improving the
costly. To improve bank branches
operational and inter
efficiency they CASA Capital operability
needed to Deposits Requirement network within
increase them. The branch
proportion of numbers to be
Current account increased
and Saving required more
Account deposits capital inflow and
Capital Inflow needs Profits which which would only
which are less
costly
requires High CASA! be possible with
reduced interest
expenses

7
Other Problems
Lower number of Retail branches as compared to peers. AFL
branches not suited for regular banking. Layout and branch
position not best suited for retail banking

Bank lacked the technology support that the customer

demanded from and that the peers provided for banking
needs

No pricing power in terms of Corporate Banking. One sided

corporate asset book and low yield on vehicles and SMEs

Not generating enough fee income from both Retail and

Corporate Banking, Low ratio compared to peers.

8 11
Missed Opportunities
CORPORATE RETAIL (Except vehicle loans)
(Apart from proprietary trading)

• Short-term working capital products • Life Insurance products

• Forex products • Vehicle insurance products
• Management of IPOs • Cross-selling
• Investment banking facilities e.g., raising debt for SME • Insurance products linked to equity market
customers • Wealth Management products for high-net-worth
• Loan syndication individuals

Other issues:

• Risk-management being undertaken by branch senior managers

• Need to invest in technology to attract CASA deposits
• Cash management was outsourced

9
Solution Proposed (1/3)
Balancing Assets and Liabilities Retail Fee Income
65% of the assets were at a fixed Potential for selling life insurance,
rate while most of the liabilities mutual funds, wealth management
were floating. Higher proportions of products to high net worth
the loans should be re-priceable individuals
while making the liabilities side less
floating

Corporate Franchise Product Mix

Gradually build the corporate Asset books was highly weighted in
franchise through short term favor of large corporate customers,
working capital products and good possible to increase the yield on the
service, focus on recovery of bad corporate book by changing the
loans to free up capital for weights to favour SMEs
reallocation to new clients

11
10
Solution Proposed (2/3)

05 Corporate
06 Organizational 07 IT
Fee Income Issues integration

Bank was not generating enough Provide Global Markets the

Proper integration of IT with
income from corporate and retail necessary focus by posting a
operations, development of a
customers, forex products could be different head than that of
automated front end branch
sold to corporates, scope for Wholesale Banking. Also, get more
processing, enabling the bank to
management of IPO’s and other IB focus on segments of Corporate
see all the products purchased by a
activities, cash management and Banking such as large corporates,
customer, better targeting due to
collection of cheques could also be SMEs, and other liability providing
cross-selling opportunities
looked into, even loan syndication companies. Work on standardizing
was neglected the BUs

11
Solution Proposed (3/3)
Operating Costs
Operating costs should be brought down by having single offices for vehicle
financing, retail and corporate divisions, having single sources of procurements
for different parts of the bank

Risk Management Policy

Proper segregation of risk and business, development of centralized risk
management ensuring quick turnaround times for loan proposals

Hiring Process
Attracting the right people and matching their base compensation to that of
competitors, proper training for the new recruits

Corporate Vision
Development of corporate vision and strategy so that employees are clear about
their objectives and don’t feel disengaged
Along with certain
aspects of IT integration
playing a key role
We can solve through
certain organizational
changes

12
Recommendations (1/3)
Customer Focus (Centricity)
To improve Top-line
 Customers of AFL and IndusInd should be combined and brought onto a common
one type platform.
 Improving Customer experience & Service Quality in long run will gather more
CASA deposits & will increase loan portfolio to include more customers
 This in turn will also increase size of the Balance Sheet.
To improve Bottom-line
 Focus on improving relationships within Corporate Banking & Commercial Banking
services of the company.
 Improving customer retention which will be done by following specific reward models for
loyalty & timely credit repayments.
 Gathering customer feedback on services
 Increasing convenience for people using Mobile & Internet Banking Services

13
Recommendations (2/3)
Products & Services (Offerings)
To improve Top-line
 Cross-selling & Up-selling opportunities must be explored, leveraging experiences of
employees of AFL for Personal Banking & Wealth management facilities
 Launching of new products like Home Loans, Education Loans and Personal Loans. In
addition to Insurance products like Life Insurance, Vehicle insurance, etc.
 Forex products like IPO Management, Investment Banking facilities, Loan syndication, etc.

To improve Bottom-line
 Operational expenses can be significantly reduced by partnering with other Banks for
specialized products like Home Loans or Personal Loans.
 Improving Cash management amongst Branches by implementing a common way.
 Centralized integrated Risk Management which is uniform to al branches
 IT interventions to standardize & automate all Back office procedures by implementing
ERP, CRM & Banking solutions for the various processes
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Recommendations (3/3)
Organizational (Macro)
To improve Top-line
 Improving Employee training & motivation by making Managers responsible &
rewarded for Branch operations as if they own the branch.
 Improving relations with Regulatory bodies & gaining their trust by working for
improvement in ratings provided by Ratings Agencies.
 This in turn will attract better future prospectus for the company.

To improve Bottom-line
 Reducing Attrition rate in Senior management by involving employees in a cohesive
decision making approach which will be exhaustive list of employees.
 Optimizing Performance Management system using right corporate vision & strategy and
properly delivering that to the organization.
 Creation of a NPA monitoring Committee for continuous follow up on credit recovery.

15
THANK
YOU
Higher Higher
Higher Customer Increased Levels of
Satisfactio Sales Profit
n
Servic
e Higher
& Shareholde
r Returns
Quality