Prudential Norms, The "Two-Step" Debacle, and the 100-Lakh Miracle
In the late 1980s and early 90s, the Indian banking landscape underwent a seismic shift. The Reserve Bank of India and the Ministry of Finance introduced Prudential Norms, requiring banks to classify assets strictly as Performing, Substandard, Doubtful, or Loss. For IOB, this was a moment of reckoning. We declared a staggering loss of nearly ₹750 crores—our capital was effectively wiped out.
A significant portion of this "mountain of debt" stemmed from our overseas advances in Singapore and Hong Kong, particularly for joint-venture offshore projects in Indonesia. These were not bad businesses; they were victims of a currency catastrophe. The Indonesian Rupiah was devalued three times, meaning projects generating local currency had to pay back dollar loans at four times the original cost.
The Challenge of the "Grilling"
I was placed in charge of the Overseas Credit Department just as I was expecting my interview for promotion to the Executive Director cadre. I was hesitant; I knew the RBI and Ministry officials on the interview committee would "grill" me for the bank's overseas failures.
My boss sarcastically told me he would record in my file that I was not incharge of the overseas credit department so that they will not grill me. I took it as a challenge. I had the best managers in Colombo (Sri Chidambaram), Singapore (Sri B.Swaminathan), and Hong Kong (Sri Srinivasan) — with their collaboration, I had the right momentum to finally take a firm stand on this stagnant portfolio and resolve issues that had been dormant for years.
The 10-Volume Truth
Before convening a consortium meeting, I spent days reading through over ten volumes of files. What I discovered was shocking. The borrowers’ intentions were not suspect; the fault lay with the banks. For years, legal departments and boards had passed resolutions for concessions, but the communications had been lost in a "stalemate" of back-and-forth letters.
We convened a direct meeting with the borrowers and the consortium bankers.
The borrowers, who flew in from Indonesia just to "say hello," were cynical. They told me, "It will take at least three months just to get the minutes of today’s meeting."
I looked them in the eye and said, "You will have the signed minutes before you leave this building today."
The "Turning Point" in the Boardroom
In the meeting, I made a bold appeal to the other six participating banks: "Authorize me to deal with these customers in the interest of all. I will take full responsibility for protecting the consortium, provided we do not deviate from what your boards have already approved."
Two banks hesitated, wanting to refer back to their legal departments. The other four, moved by the logic of ending a decade-long stalemate, pleaded on my behalf. Finally, they agreed.
I did not wait for "office notes" or "draft approvals." My PA recorded the minutes in real-time. We typed them, signed them, and handed a copy to the company representatives before they reached the elevator. Our own legal department was awestruck.
The 24-Hour Miracle
The result was instantaneous. Within twenty-four hours, we received the first installment of nearly $100 lakhs (1 crore) in remittances—the first money the bank had seen from these accounts in years. The jubilant phone calls didn't stop for days. We had proved that the "Doubtful Asset" was, in fact, a "Honest Asset" trapped in a broken system. Very soon we received 50 million US $ credited to our Nostro A/C. The branch had the privilege of reversing the huge provisions made for raising loss in their balance sheet and reflected it in their current years financials.
Shortly after, I attended my Executive Director interview. Instead of a "grilling," I stood there with a record of recovery. I was selected and posted to my new assignment with my head held high.
By trusting the borrower’s genuine struggle and cutting through the "stalemate" of inter-bank bureaucracy, we turned a national liability into a recovery success.
The most "mountainous" default can be moved by a single act of decision making and mutual trust.