N.S.Vageesh

Business strategies bear the brunt of change of guard

Chennai June 22 You would have definitely heard of the new broom effect.

This is something that can be dubbed the "new chairman syndrome" in the banking world.

Whenever there is a change of guard in a public sector bank, the rank and file know that it is not going to be "business as usual".

Come to think of it, that may seem a bit strange. After all in public sector banks, the government is the owner, there is seldom a change in its mandate for these banks.

Continuity & Change

Of course, the incoming honcho promises "continuity and change."

Some cynics would interpret that clichéd opening line to mean - the new man will continue to do what he was doing earlier and change whatever his predecessor was doing!

It may not be as extreme as that. Yet more often than not, the arrival of a new chairman in a bank can reverse or alter business strategies laid down earlier. It could for instance, mean focussing more on retail business vis-à-vis corporate business or vice versa. It could mean relying more on bulk deposits compared to retail deposits. Or it could mean a change in fund raising plans.

Take a couple of recent instances. When Dr K.C. Chakraborty took over as Punjab National Bank Chairman, he immediately announced the postponement of a proposed equity offer. Similarly, Mr Narayanasami, when he took over as CMD of IOB in June 2005, cancelled plans for a GDR issue and also hiked the business growth targets from 10 per cent to 20 per cent.

In a different instance, Dr Chakraborty, as soon as he took over as CMD of Indian Bank in June 2005, had said that the bank would need more time before going to the public. Just a little before that, the impression given by bank officials was that an Indian Bank IPO was imminent. As it happened, it was a full one-and-a-half years after he took over that the bank eventually went public.

A year ago, when Mr O.P. Bhatt took over as Chairman of SBI, there were some changes - most visibly in the area of international operations and SBI's plans to buy other banks abroad.

Change at SBI

Here is what the new chairman said, "The bank is planning a re-look at its own overseas operations. I will not grow market share at the cost of profitability. It does not make sense to have a few branches overseas. I would prefer consolidating their operations rather than acquiring a few more branches. It doesn't make any sense for a bank like SBI to buy a small bank abroad just to have its presence in that country. If we get a good offer and the country in which the bank has a good business fit with our country's trade, then it makes sense to look at it. In any case, we are not actively looking (overseas acquisition).''

Just a couple of months before that statement, his predecessor, Mr Purwar had said, "We are becoming more ambitious in overseas acquisitions. We are working on acquiring a small bank, but we would also be interested in a big one.''

The bank would be willing to pay up to $100 million for a single deal, Mr Purwar had said. SBI had then acquired stakes in banks in Mauritius, Kenya and Indonesia.

"Apres Moi, La deluge!"

A couple of years ago, a change of guard also meant that profits of those banks would fall in the immediately following quarter. The explanation offered by experts for this phenomenon - the retiring chairman wanted the highest profits when he quit so as to go out on a high note. And the incoming chairman didn't want the base to be too high when he started his innings and would therefore ask for the maximum provisions to be made to keep profits at a manageably low level.

Given that average CMD tenures were then less than 24 months, one can imagine the volatility in earnings for the banking sector.

It was, as a perceptive observer remarked, a local version of "Before me the chaos; after me, the deluge!"

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