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FEB. 25, 2007
 Cover Story
 BT Special
 Back of the Book

Trading with ASEAN
In the recent Indo-ASEAN summit, ASEAN was, for the first time, on the defensive. India has agreed to bring down its negative list of imports to 490 items in the free trade agreement with the 10 ASEAN nations. But India’s step towards free trade was not matched by the ASEAN nations, as more than 1,000 items still figure in the negative list of the ASEAN. In 2005-06, India’s total trade with ASEAN was at $22 billion (Rs 99,000 crore), against just $7 billion (Rs 31,500 crore) in 2000-01.

Exchange Deal
Indian markets are on a roll. Global stock exchanges and financial institutions’ interest in the Indian stock exchanges goes to show the long-term growth potential of India Inc. The year has started on a positive note. The NYSE and three global financial institutions have each picked up a 5 per cent stake in the NSE. The deal will open exciting vistas in global co-operation for the NSE, and at the same time could improve the fortune of smaller exchanges in the country.
More Net Specials
Business Today,  February 11, 2007
The Agile PSU Banks
Despite constraints, a few public sector banks are beginning to think and act like their more successful private sector rivals.
More ATMs than branches: Corporation Bank's Sambamurthy is using technology to increase efficiency
History and social obligations weigh heavy on most public sector banks in India. It wasn't a big issue as recently as five years ago when the economy was merely coasting and not galloping like it is now. But with the economy expanding at 9 per cent annually and India Inc. drawing up unprecedented plans for growth, these banks sometimes find themselves watching the action from the sidelines. There is a natural disadvantage to constantly looking over your shoulder. "While there is enough freedom and autonomy in public sector banks, the accountability format is different. There is no scope for failure in the public sector," says the head of a leading public sector bank. Add to it the unionised employees.

Notwithstanding these constraints, some public sector banks are beginning to cash in on the booming business environment. It is a trend that is visible right across-from the behemoth on the street, State Bank of India, to its smaller cousin, Bank of Baroda. However, the most dramatic and the most effective impact has been on the smaller banks such as Federal Bank and the State Bank of Hyderabad. These banks, while not necessarily the strongest banks, have shown the most improvement in responding to the business environment. "Banks at the top of the list are those that have managed to balance the risk-return matrix quite well. It boils down to strategy and its implementation and they seem to be getting it right," says Sanjay Aggarwal, Head (Financial Services), KPMG, which collaborates with Business Today on the annual Best Banks survey.

Significantly, the total scores of three out of four state-owned banks in the top 10-Corporation Bank, State Bank of Hyderabad, and Indian Overseas Bank-are pretty close. While the latter two have equal scores of 2,167, just two points on weighted score (2,169) separate them from Corporation Bank at the sixth position. The fourth player in this quartet, Allahabad Bank, is also not too far behind at #9.

The narrow gaps in final performance belie huge variations in individual metrics of these banks. But, then, that probably stems from the unique operating environment available to each bank and the strategy that they adopt in implementing it.

Corporation Bank: Process-Focussed

"Although we were a little late in adopting technology, we are now increasing emphasis on it"
A.C. Mahajan/Chairman & MD/Allahabad Bank
Traditionally among the better-run banks, Corporation Bank has slipped two places to #6 in this year's survey. The bank has been a mid-performer on most growth and size parameters and that seems to be intentional. The bank's Chairman and MD, B. Sambamurthy, agrees that "the bank has been a little selective in encashing growth opportunities". CorpBank, however, makes up on metrics related to quality of assets and productivity and efficiency. Its technology-backed cost structure is quite light and helps it retain its competitiveness. In fact, at 41.53 per cent, CorpBank's cost-to-income ratio is second only to StanChart among the banks having a balance sheet size of more than Rs 20,000 crore.

The bank was an early adopter of technology. "We are probably the only bank in the public sector space that has more ATMs than branches," points out Sambamurthy, adding that nearly 55 per cent of the eligible business has moved to the ATMs. The bank has 935 ATMs and 850-odd branches. And barring a few, most of the bank's branches are working on the core banking platform. For now, the focus is on improving processes-processes that help employees spend "quality time with customers".

Premium products are another advantage that the bank wants to leverage. It is currently in the process of repositioning its cash management services among other product offerings. On the retail side, it plans to offer more capital market services and payment products. To address the issue of size and scope without consolidation, it entered into a strategic alliance with Indian Bank and Oriental Bank of Commerce late last year. The test of the bank's cautious strategy may come in years when the economy slows down.

Indian Overseas Bank: In the Fast Lane

"IOB is probably the only PSU bank that did not go in for a follow-on public offer in the last two years"
T.S. Narayanasami/Chairman & MD/Indian Overseas Bank
Chennai-based Indian Overseas Bank gains on size and quality of assets and earnings parameters and it is no surprise that the bank has climbed from #11 to # 7. It has, in fact, shown searing growth in the current financial as well. The growth in advances is backed by conservative provisioning and tight cost-to-income metrics. The return on capital employed tops the chart. Chairman and Managing Director T. S. Narayanasami points out that IOB is probably the only bank that did not go in for a follow-on public offer in the last two years and its capital adequacy is still at nearly 14 per cent compared to the regulatory requirement of 9 per cent. However, IOB's performance is significantly held back due to a slow deposit growth relative to the industry. That's true of its fee income as well.

The broad trends so far this financial year are also similar. The bank has seen business top the Rs 1-lakh-crore mark and it expects to close 2006-07 with a 20 per cent growth in net profit. "There is no negative surprise in Indian Overseas Bank except for rapid growth," says a Mumbai-based bank analyst, pointing to concerns regarding funding of this growth. Narayanasami agrees that moderation in credit growth is needed since the credit-deposit ratio is touching 74 per cent. To sustain and fund this growth, the bank is considering securitisation of infrastructure loans along with mobilisation of retail term deposits through quarterly campaigns. It raised nearly Rs 1,600 crore in October-December and hopes to mobilise another Rs 2,000 crore in the current quarter.

Allahabad Bank: Cost Competitive

"In the days to come, deposit pricing will be an important determinant of the bottom line"
Amitabha Guha/MD/State Bank of Hyderabad
The 140-year-old bank based in Kolkata has turned around significantly in the last few years. Its net NPAs were as high as 10 per cent of its net advances in 2001-02. This figure dropped to 0.84 per cent last financial year. Cleaning up its balance sheet is only one of the issues. Performance on growth metrics is extremely good as far as advances and operating profit are concerned. Even though deposit growth was a little sluggish in 2005-06, over a three-year period it is in the top bracket. It slips somewhat on size parameters, but not too much. Return on assets and return on capital employed is in the top league.

Finquest Securities' CEO Sejal Doshi finds Allahabad Bank the top pick in the banking sector given its business volumes and core operating performance. The bank also has a higher share of current account deposits and is much better equipped than most others to handle the cost pressures in the sector. Its massive reach in the semi-urban areas is an added advantage.

The bank, however, has not been able to leverage its branch strength most appropriately as can be seen from the operating profit per branch-one of the lowest in the industry. So no surprise that the credo has shifted to growth from all branches and not just some. Add to it the rapid adoption of the core banking platform. "Although we were a little late in adopting technology, we are now increasing emphasis on it," says Chairman and Managing Director, A. C. Mahajan. The bank is currently working on a pilot project with Tata Consultancy Services.

State Bank of Hyderabad: Quality-Minded

The State Bank of Hyderabad (SBH) has shown all round improvement, which is reflected in its overall rank jumping from #31 to #7. Although its size and cost performance is average at best, the quality of its assets is fairly high. It has done well on growth parameters such as fee income, and is among the top performers as far as absolute increase in return on assets is concerned. Net NPAs as a proportion of net advances are among the best in its peer group. However, the bank's small capital base (Rs 17.25 crore) gives it an advantage as far as metrics such as return on capital employed are concerned.

The bank's Managing Director, Amitabha Guha, believes that it is critical to sustain the growth momentum along with profitability. And cost is at the top of the agenda since that's an area of weakness for SBH. However, as Guha points out, the base for 2005-06 was skewed, since there was a nearly Rs 100-crore one-time settlement of wage arrears. The absence of that alone should positively impact costs by 200-300 basis points, he says.

The bank added some 10 lakh new deposit accounts in the current financial year up to December alone. Guha believes that in the days to come "deposit pricing will be an important determinant of the bottom line". As for loans, the bank is focussing on delivery times, which it has crunched significantly in the past few years.


Cost is going to be a challenge across the banking universe in the quarters ahead. As an analyst at a foreign brokerage says, "Banks will more likely surprise on the cost side." Public sector banks with their wider semi-urban network have a better ability to tap the current account savings account (casa) deposits and thereby, keep costs under a tight check. Attracting and retaining talent is yet another big challenge facing the public sector banks, as their compensation levels are way below those of private sector and foreign bank peers.

Corporation Bank is trying to address the issues of lack of talent by putting its officers through executive education programmes at institutes such as the Indian Institute of Science and the Indian Institute of Management Bangalore. Allahabad Bank, on the other hand, is working on a report by XLRI Jamshedpur to retain talent. But CorpBank's Sambamurthy feels that it is time to introduce "better pay for better performers". Indeed, there are reports that the government may allow PSU banks to offer performance-based bonuses to its top executives.

The talk of pay-for-performance is a measure of the distance that public sector banks have travelled over the last decade or so. Financial disclosures, prudential norms or provisioning have all become much stronger. As IOB's Narayanasami says, "We are moving in the right direction." Before long, ambitions of size and scale should start a clamour for consolidation too.