Bank with no CEO and 20% bad loans shows challenge for Modi

[MUMBAI] As Indian Overseas Bank tackles the highest ratio of soured loans among lenders in Asia's third-largest economy, it doesn't help that there hasn't been a chief executive officer at the helm for about three months.

The state-controlled lender based in the southern city of Chennai has had a leadership vacuum since R Koteeswaran retired on June 30 after completing an 18-month stint. United Bank of India got a new top manager in August after a five-week gap, while Canara Bank and Punjab National Bank got theirs in 2015 after more than nine months under the supervision of executive directors.

Prime Minister Narendra Modi needs to revive the banking system burdened by about US$120 billion of stressed assets to spur credit growth and support expansion in the US$2 trillion economy. The government has set up a bureau to vet top executives and advise on fundraising, split the chairman and CEO roles, mooted mergers and cut state interference in commercial decisions.

"Without strong management having longer tenures at the helm, it is difficult to turn around many of these struggling state-run banks," said Siddharth Purohit, an analyst at Angel Broking Ltd in Mumbai.

"You have to pick the right candidates and give them time to formulate and implement strategy." Indian Overseas Bank hasn't got a CEO yet and is still awaiting a decision from the finance ministry, R Ravichandran, an official in its investor relations department, said by phone on Thursday. There is no acting CEO, he said.

The yield spread over Treasuries on its US$500 million of 2018 notes was 228 basis points on Sept. 22, widening from 201 on May 13, Bloomberg-compiled prices show.

The notes, rated one level below investment grade by Moody's Investors Service, returned 2.9 per cent this year while Asian banks junk notes gained 6.3 per cent in a Bank of America Merrill Lynch index.

Bank of India's credit-default swaps have risen 24 basis points this year, according to CMA in New York. S&P Global Ratings downgraded the lender with Indian Overseas Bank and Syndicate Bank on May 30. Indian Overseas Bank's shares have dropped 12.6 per cent this year, while the S&P BSE 500 Index climbed almost 13 per cent.

CEOs at state-run banks usually get three-year terms or less, much shorter than heads of private-sector peers. Aditya Puri has been CEO at HDFC Bank Ltd for more than 20 years, while ICICI Bank Ltd's Chanda Kochhar has been at the helm for about eight years.

In general, "the long-term goals and focus comes from the CEO as he has the seal of the government," said Charan Singh, executive director of UCO Bank.

"If the CEO is not there, the second-in-command may be an efficient person but he knows he isn't the CEO. His focus would remain on managing the day-to-day affairs."

Indian Overseas Bank's bad-loan ratio stood at 20.5 per cent as of June 30, versus 9.4 per cent a year earlier and an average of 11.3 per cent at 27 government-led banks and 2.8 per cent at private sector banks.

India announced in July a 229 billion rupees (S$4.6 billion) infusion for 13 banks. While the injections are inadequate, state-owned banks will continue to receive a very high level of support, said Srikanth Vadlamani, a credit analyst in Singapore at Moody's.

Governance lapses have contributed to slippage in asset quality in the past, he said.

"Not having a CEO at this stage is negative for IOB," he said. "However, we don't think corporate governance problems are unique to IOB." At least eight state-run banks including Indian Overseas Bank, Punjab National Bank and UCO Bank have no chairman as of now, data compiled by Bloomberg show.

"The question is has enough happened over the last two years to change our view that corporate governance is not a credit weakness for these banks?" asked Mr Vadlamani.

"The answer is no."

BLOOMBERG