OBC's B.D. Narang: Needs to overhaul its laid-back PSU culture

It takes B.D. Narang 45 minutes to an hour to drive from his house in New Delhi's New Friend's Colony to his office in Connaught Place, the Capital's colonial era central business district. As his chauffeur-driven Mitsubishi Lancer weaves its way through the rush hour morning traffic, the 59-year-old Chairman and Managing Director of Oriental Bank of Commerce (OBC), seems oblivious to the bustle outside. It's not yet six months since the Reserve Bank of India (RBI) forced him into a shotgun marriage with the failed Global Trust Bank (GTB) and he's already counting his gains: Synergies are being tapped, OBC's footprint now spans the length and breadth of India, the NPA (non-performing asset) monster has been capped, though not yet beaten, and expansion plans are on schedule.

Just to recap, the central bank had declared a moratorium on GTB on July 24, 2004, and two days later, announced a scheme for amalgamating it with OBC. This was greeted with howls of protest. Analysts and experts were then near-unanimous in their opinion that the Rs 58,000-crore OBC, one of the country's most successful public sector banks, had been sold a lemon.

This argument cuts no ice with Narang. He categorically rejects the notion that the RBI had thrust the deal on him. Other clever arguments along these lines meet the same fate. "After 15 months you will rate this merger as a milestone in the Indian banking sector," exults Narang, sitting in his modest third-floor office at Harsha Bhavan. He points to the Rs 68,000-crore post-merger balance sheet of his bank, Rs 10,000-crore stronger than its pre-nuptial avatar, to buttress his case. And that's not taking into account the foothold that the former GTB gives him in the prosperous South, something that OBC had been trying unsuccessfully to do for many years now; the status of a national bank that comes along with it is the icing on the cake.

But why is the South so important for OBC? "The next boom," he explains, "will come from gas and gas-related activities in the Krishna-Godavari Basin on the Andhra coast and parts of Gujarat." OBC already had a substantial presence in the West; and GTB provided it with a ready-made plugged-and-playing infrastructure in the South. In one stroke, OBC also doubled its presence in the two regions and gained some much-needed technological muscle: GTB's 275 ATMs multiplied its existing strength of 72 by a factor of almost five, making it the third largest ATM operator among PSU banks. Narang simultaneously expanded his roster of depositors by nearly a million well-heeled customers and added 103 branches to his existing network of 1,013. "How can any bank afford to lose out on such a vast opportunity?" he asks.

The OBC chief, who has a master's degree in economics from Punjab Agricultural University, has also done his math very carefully. And the numbers say that he's on to a good thing: The net cost of acquiring GTB is a piffling Rs 64 crore.

How? After accounting for the tax gains from the merger of GTB, the total losses come to Rs 704.6 crore. GTB has NPAs of about Rs 1,500-1,600 crore (the exact figure will be known only after the due diligence is completed in 2005-end). Given its record of 40 per cent recovery-the highest in the Indian banking industry-OBC hopes to recover Rs 641 crore from the bad assets that it received in dowry, leaving an uncovered gap of Rs 63.6 crore. That's a figure it can happily live with. "We got GTB dirt cheap," feels Narang. "The issue of NPAs may take another 12-18 months to resolve; all other issues will be sorted out by March 2005." OBC, he says, should hopefully be able to generate cash recoveries of Rs 200 crore-plus by then. He is also hoping to reschedule and restructure assets worth another Rs 600-800 crore that could be upgraded next year. And by March 2006, GTB could be contributing nearly Rs 100 crore to the bottom line of the joint entity, according to Narang.

For now, he has completed his immediate task of calming GTB's 8.34 lakh retail investors and has revised his growth target for the current fiscal. Before the merger proposal, OBC had targeted a 25 per cent growth in 2004-05. This has been raised to 30 per cent. The goal: A balance sheet size of Rs 80,000 crore. "Now nobody will take us for granted," Narang says with a hint of pride.

Following the merger, OBC has a footprint that spans the length and breadth of India

They aren't, but they're not going over the top either. The stock markets have given his plans a cautious thumbs up. The OBC scrip is up more than 30 per cent from Rs 245.6 on July 2, 2004, to Rs 320.5 on December 7, 2004, but it has underperformed the Bankex, which grew 40.6 per cent during this period. The bse Sensex, meanwhile, has appreciated 30 per cent during the period under discussion. Even analysts such as Amitabh Chakraborty, Vice President and Head of Research (Private Client Group), Kotak Securities, are rating the OBC scrip on a compelling "hold'' because despite being one of the better managed banks with significant vision and bandwidth, it is already trading upwards of two times the adjusted book value and 13 times the earning value. "And since it can only perform in line with the market, we have rated it as hold,'' adds Chakraborty.

The targeted 30 per cent growth is expected to come from commodities and infrastructure businesses-steel plants, power projects and port facilities that will come up in the East to exploit the region's abundant mineral wealth. OBC is positioning itself to be a part of this growth. It has set a scorching pace, opening branches in Orissa, Jharkhand and outside Kolkata. These operations will be monitored and directed from the new regional office it opened in Bhubaneswar on December 9.

The merger with GTB will also substantially add to its fee-based income since the former had leveraged its internet banking system to tie up with a host of companies and government bodies. For instance, it provides customers an e-payment facility for online booking of railway tickets. It also has a pact with Prudential ICICI Asset Management Company to facilitate investments in mutual funds through the internet. Integration of the two networks will be facilitated by the fact that both OBC and GTB use Infosys' Finacle as the core banking software platform.

Add to this the extremely efficient and aggressive staff that came with GTB-despite his failings in other areas, former GTB Chairman Ramesh Gelli is credited with creating absolutely top-of-the-line infrastructure and hr pool-and you have the makings of a winner. No wonder then that Narang, who is retiring in April next year, believes that the merged entity can become a Rs 1,00,000-crore networked conglomerate by March 2006, with a staff strength of just 14,000.

If these, and other projections come to pass, a lot of the credit should go to Narang. When he took over as CMD in 2000, OBC was essentially a North-base bank; four years later, it has an all-India footprint and the distinction of having zero NPAs of its own (not counting the ones which came with GTB). His track record stands out on other parameters as well: Cost of funds has come down to under 5 per cent from around 9 per cent in 2000; NPA coverage is 107 per cent compared to 23 per cent in 2002; return on assets is 1.7 per cent compared to 0.9 per cent and the cost-to-income ratio is down to 29 per cent from 40 per cent in 2000. Even the capital adequacy ratio (car) has improved to 13 per cent from 11 per cent, despite taking GTB on board. The RBI stipulates a 9 per cent car. The bank does Rs 55 crore of business per branch and Narang expects this to touch Rs 100 crore in the next two years.

So how does he expect to take the bank forward? The only way ahead is to generate greater fee-based income since gains from treasury operations are now taking a hit. "The emphasis will be on distribution of financial products-like insurance products and mutual funds-and make the bank a one-stop-shop for all activities. "People," he points out, "will increasingly look at banks to take care of functions such as payments of water and electricity bills without necessarily coming physically to the banks."

But for that, networked branches are a must. OBC is focussing on this. "Earlier we were networking three branches per week; today we do up to 15 per week," he informs. By 2006, his 400-odd branches should be networked.

But in terms of customer focus, OBC will continue to concentrate on small and medium enterprises (SMEs). The reason: "The average yield from the SME sector is 8.5-9 per cent compared to 6.5-7 per cent from large corporate borrowers. "Small people, obsessed as they are with family dignity, are unwilling to default," says Narang with conviction. GTB, he believes, went down because of its huge exposure to the corporate sector. SMEs account for 55-60 per cent of OBC's total lending, the retail business takes up another 25-30 per cent and big corporate houses the rest.

Last but not least, Narang wants to institutionalise the issues emerging from the merger, get them debated at board meetings and decide on the course of action, so that his successor has no problems.

But that's not to say that everything is hunky dory with the bank. Says Viren Mehta, banking analyst with consulting firm Ernst & Young: "The management will have to invest significant time and resources to resolve the NPA problem. Human resource issues arising out of pay parity, designation and work culture also have to be sorted out."

Of these, the hr and cultural issues are particularly significant. Despite its sterling performance, OBC still sometimes gives the impression of being steeped in the laid-back public sector culture of yore. And compared to its new private rivals, it lacks the all-out aggression that sets the winners apart from the also-rans in retail banking, the new growth avenue. Narang readily accepts this weakness and believes the "can-do" approach of the GTB employees must rub off on their OBC counterparts. Bringing about a cultural change, thus, holds the key to Narang's ambition of creating a truly great bank.