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CASE STUDY Banking on Core Competence Continued
Hiren Bose is grappling with several problems simultaneously at Hindustan Bank. This is inevitable since he is new to the organisation, and has yet to get a grip on its culture. As far as evolving an action-plan is concerned, it is important for him to prioritise the issues he needs to tackle. He should identify 5 key areas that require strategic intervention. The rest can be delegated and some, like business process reengineering, can be dealt with personally at a later date. Such an approach will ensure that the time and energy of the bank's top management is focused, and not dissipated on initiatives that do not yield quick-and positive-results. If Bose sets a time-frame for each course of action, that will reduce his worries. His top-most priority must be a turnaround. Hindustan Bank must enhance its revenues and get onto the path of profitability. Under normal circumstances, this would be best achieved by increasing its loans to blue-chip corporates. Given a spread of 4 per cent, the bank's lending portfolio must be around Rs 2,500 crore in size to fetch an income of Rs 100 crore a year. Alternatively, the best way for Hindustan Bank to generate revenues over a period of, say, 2 years is to concentrate on the recovery of its Non-Performing Assets (NPAs). Contrary to popular belief, NPAs represent a pool of provisions that offer an excellent opportunity to increase revenues. The bank has only to increase the recovery rate. Given its sense of urgency, Hindustan Bank should be able to reduce its dud loans. Even small successes in the management of NPAs could restore employee morale. While the liquidation of NPAs may be a far-fetched idea, it should be possible to reduce the ratio from 16 to 8 per cent of Total Advances in 2 years. Such a step would unlock funds of Rs 750 crore. With more than 50,000 employees on its pay-roll, Hindustan Bank is, clearly, bloated. A Voluntary Retirement Scheme (VRS) is, of course, a worthwhile option. But there are serious limitations in implementing it: the recognition of pension payments as a third benefit is a deterrent. Even if 5,000 employees were to opt for a VRS, it would cost the bank Rs 500 crore. Funds would, definitely, be a constraint. The best option is to take proactive people-management measures. Bose should identify the potential leaders in the organisation. They should be assigned key functions, and provided overseas exposure besides handsome compensation. This will have a dramatic impact on the morale of the organisation. After all, recognition always has a ripple effect; it is a confidence-building measure in any turnaround. Bose should also send out signals that he values merit. Accordingly, attempts must be made to ensure that promotions, rotations, and transfers are fair and transparent. The bank must leave no stone unturned to retain clients. This is where the bank's new competitors have an advantage. Being technology-savvy, the latter find it easier to relate to the new generation of entrepreneurs who are equally drawn to the benefits of technology. Hindustan Bank may well be surprised to learn that clients who have grown with it are, gradually, being weaned away. There are several ways to stop this. Some branches of the bank can be converted into special centres of activity-like corporate finance and small-business finance-which are empowered to take quick decisions without having to wade through elaborate procedures. These branches could turn Hindustan Bank into a customer-friendly organisation. Technology should also be a thrust area. Bose should pick 100 key branches and fully computerise their transactions. This will have to be a phased programme, but a beginning must be made immediately. It will require an investment of Rs 300 crore over a period of 5 years to obtain a critical mass of about 200 wired branches. Once the technology is in place, delivery channels will become more cost-effective. It will also be easy to launch products aimed at specific customer segments. Then, Bose should set his sights on good house-keeping. In a large bank, the lack of checks-and-balances can throw systems out of gear, and timely internal reconciliations become formidable tasks. All banking activities are bilateral, and vulnerability prevails at both ends of a transaction. Manual accounting is usually prone to both human and systemic failures. While technology is the only long-term solution, good house-keeping practices are of the essence. Bose must spend a considerable part of his time on Human Resource Development (HRD) in the first 2 years. It is unfortunate that most banks do not have HRD professionals on their boards. Hindustan Bank should appoint an operations manager to head the HRD function. Obviously, a line-manager who has excelled at people-management skills would be in a better position to handle delayering and boosting employee confidence rather than a staff functionary. Simultaneously, Bose should hire top-notch talent from the foreign banks. That would bolster his attempts to take Hindustan Bank into niche segments. While these initiatives could take between 2 and 3 years to bear fruit, seeking a strategic alliance with a suitable partner would telescope the time further. It will not only improve the bank's credibility, but also rebuild its capabilities. But then, disinvestment is a pre-requisite to initiating a strategic alliance. Bose must first utilise his resources optimally, and focus on organic growth before scouting for partners. Competitiveness will place the bank on a stronger wicket to negotiate with its would-be partners. Since the government's plans to divest its equity in Hindustan Bank are not immediate, strategic alliances seem a little far-fetched at the moment.
As he himself points out, Hiren Bose must rise to the challenge. But he must proceed methodically. His immediate concerns: restoring the financial health of the bank, and focusing on new business segments. The latter would help Hindustan Bank ward off competition, and test its competencies. Simultaneously, the bank must take stringent measures to build on its strengths: a large asset-base, a network of around 50,000 branches, and access to privileged accounts, like those of the public sector units. Although the business volumes, both deposits and advances, are rising regularly every year, the losses are formidable. The best indicator of a bank's health is its ratio of Non-Performing Assets (NPA) to Total Advances. Judged by that yardstick, Hindustan Bank is in a precarious condition: dud loans account for 16 per cent of its loans portfolio. Although the ratio has gone up to 20 per cent in the case of some public sector banks, 16 per cent is still high. Writing off loans, which are already bleeding the bank, will weaken it further. But there is another major cost-head which is preventing the bank from becoming profitable: employee expenses, which have doubled between 1991-92 and 1995-96, reaching a high of Rs 623 crore in 1995-96. They are out of proportion to Hindustan Bank's income. The fact that this has happened when the staff strength has remained the same, and the number of branches has increased only marginally is a telling commentary on the operations of Hindustan Bank. Employee costs have eroded whatever benefits the consistent growth in business volumes have raked in. Bose should quickly initiate some fire-fighting exercises to contain the damage. Simple as it may sound, there are two areas that the bank should worry about: increasing its income, and cutting costs. The bank has quite a few loyal clients. Bose must ensure that they continue to stay with the bank. Some of the customers may not be using the bank for all their financial requirements. Instead of scouting for new clients, Bose must ensure that all his old clients are provided excellent service. That would set in motion a process of recovery that can be supplemented by other efforts. Bank of America is an example of revival through such a route. It was the No. 1 bank in the 1970s, but began to slip over the years. This happened when the bank started moving away from its mid-segment customers, who constituted its bread-and-butter. It was only when the bank returned to its customer-base that it turned the corner. It is important for Bose to initiate a regular dialogue with his key customers to ascertain their changing requirements. Close contact with customers will, ultimately, increase Hindustan Bank's marketshare. All Bose needs to do is to bolster the bank's infrastructure by investing in infotech, offering specialised services, and hiring top-notch talent. He can also pursue new businesses, such as correspondence banking, cash-management, and custodial services, once he sews up a strategic alliance. Hindustan Bank's biggest threat-the new private sector banks and the foreign banks-can be easily countered since their cost of funds is 10 per cent and above. This is what Bose should capitalise on given the fact that he can source funds at a cheaper rate of 5 per cent. In fact, the vast network of branches is a blessing in disguise for Bose as they can be used effectively to mobilise cheap funds. A deposit-mobilisation effort must be set quickly in motion by the CEO. The best strategy would be to increase the number of savings accounts, which would bring in more low-cost deposits. That would increase the bank's spreads at a rate faster than its competitors, who do not have a large network of branches and, hence, cannot mobilise cheaper deposits. Simultaneously, the top management should monitor the bank's investment portfolio-yet another tool to increase revenues. Compressing staff costs is not an easy task for an organisation like Hindustan Bank. A Voluntary Retirement Scheme (VRS), for example, is, by no means, a cheap option given the pressure on funds. In fact, even a Pay-For-Performance plan is not easy to implement. The State Bank of India, for example, mooted this idea as far back as 1983, but the scheme has yet to take off. So, Hindustan Bank has only two short-term options: retaining its employees, or identifying loss-making branches and rationalising the workforce there. It is also important for Bose to create new lines of activity in areas that have a high proportion of fee-based income. Some examples: depository services, foreign exchange operations, custodial services, and trading. But he must assess whether the bank has the ability to withstand competition in the future. By using infotech, Bose can take his organisation closer to the customer. So, it is important for him to underline the importance of the internal customer in the organisation. This would mean putting employees, particularly those who interface regularly with customers, through training sessions. Bose need not worry about a merger at this stage. Hindustan Bank is hardly an attractive merger proposition today. Of course, tomorrow could be different. Then, synergy and cultural fit will count. The merger of two entities should reinforce each other's strengths, and enhance shareholder value. Even a strategic alliance could be a good bet. But that would be possible only when the fires have been doused. While Bose's long-term priorities are perfectly in order, he needs to get a grip on what he should do in the short term. That is the key to Hindustan Bank's survival. |
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H.N. SINOR CEO,
SUPRIYA GUPTA,