Kochi: Generations old, largely parochial private banks in south India are set for a makeover. They are planning to go beyond their traditional community-based retail customers and small businesses into corporate lending and pan-India operations, even as they modernize operations as well as technology.
Graphics: Ahmed Raza Khan / Mint
At least two of them—78-year-old Federal Bank Ltd and 95-year-old Karur Vysya Bank Ltd—have hired the services of consulting firm Boston Consulting Group, or BCG, to help them restructure their businesses. While Federal Bank, in the middle of a bitterly fought battle to take over the 89-year-old Thrissur-based Catholic Syrian Bank Ltd, appointed BCG almost a year ago, Karur Vysya Bank has sought the consultant’s services recently.
A senior BCG executive confirmed the development but declined to give details, citing client confidentiality.
M. Venugopalan, managing director and chief operating officer of Federal Bank, says as banking gets intensely competitive, a “diagnostic approach” is necessary to look at its products, clients and reach. “BCG has made some initial recommendations and is still working on an overall growth strategy,” he says.
According to him, unless there is geographical expansion, the annual growth will be limited to 10-15%. Keeping that in mind, the bank has 289 of its 669 branches, or 43%, outside Kerala, with a presence in every state in the country. It has started focusing on other southern states such as Tamil Nadu, Andhra Pradesh and Karnataka aggressively.
According to the bank’s former chairman K.P. Padmakumar, Kerala’s old private banks have a loyal customer base and on the lines of new generation private banks, they should appoint customer relation managers to cross-sell products to help banks earn fee income and customers make the best use of their surplus money.
The Indian central bank gave its nod to the so-called new generation private banks in mid-1990s to foster competition. These technology-savvy banks are innovating products and competing with foreign and public sector banks in urban pockets.
Public sector banks, however, continue to dominate the industry, with about 70% share of banking assets. The foreign banks’ market share is around 7.25%. Old and new private banks and other intermediaries account for the rest.
Headquartered in Karur, Tamil Nadu, with a network of 312 branches, Karur Vysya Bank also wants to expand to other states. Its managing director and chief executive P.T. Kuppuswamy says the consultant’s mandate is to prepare a growth strategy restructuring the whole business plan.
At the end of September, the bank’s total deposits stood at Rs16,529.29 crore and advances Rs11,997.6 crore. Federal Bank is relatively large, with a deposit base of Rs33,439.21 crore and advances of Rs25,779.02 crore.
Both the banks are sound in terms of two key parameters —quality of assets and capital adequacy ratio. The net non-performing assets, or NPAs, of Federal Bank is 0.54% and that of Karur Vysya 0.22%. Against a regulatory requirement of 9% (Rs9 capital for every Rs100 worth of assets), Federal Bank has 17.91% capital adequacy ratio and Karur Vysya 16.01%. This means, both the banks can grow their business even without raising their capital base for the time being.
Kerala-based Dhanalakshmi Bank Ltd has not appointed any consultant but professionalized its board and brought in a new team to manage its business. Its managing director and chief executive Amitabh Chaturvedi says the banks has, over the past year, “revamped its entire operations”.
Historically, its clients have mostly been temples and educational institutions in the state, including the cash-rich Guruvayur Sree Krishna temple and the hill shrine of Lord Ayyappa. But now it is changing its profile.
“We have been expanding outside Kerala and now have 19% of our 221 branches outside Kerala,” says Chaturvedi, adding that the bank is looking at lending to large corporations besides small and medium enterprises, or SMEs.
V.P. Iswardas, who recently took over as managing director and chief executive officer of Catholic Syrian Bank, is also looking outside the traditional client base. “Besides our strengths of SME lending and retail banking, we will seriously look at corporate lending riding piggyback with consortiums and multiple banking,” he says.
Old private banks in south India have been hit hard by the burgeoning investment opportunities available to non-resident Indians (NRIs), mostly in West Asia, who had until recently contributed to their deposit base.
Early this decade, NRI remittances accounted for as much as 45% of total deposits in leading Kerala banks, but that has now declined to 15-20% as investors look to other channels such as equity markets and real estate.
Bank officials admit better investment avenues like the equities and realty have had an adverse impact on the NRI inflow. Besides, new private banks such as ICICI Bank Ltd have taken away bulk of their remittance business by expanding operations overseas.
To shore up non-interest income, Kerala banks have become vendors of several insurance products and have tied up with exchange houses.
Banking analysts say despite a loyal client base and relatively higher net interest margin or the difference between the cost of deposits and earnings from advances, some of the old private banks may run into rough weather as rising wage bill and large recruitment could pressure profits. Other critical factors are outdated technology, entrenched trade unionism and the influence of certain communities in running a few of these banks.
For instance, the Vysya community of Tamil Nadu has a considerable say in Karur Vysya Bank and Laxmi Vilas Bank Ltd; and the Syrian Catholic community dominates Catholic Syrian Bank.
This reliance on communities can hinder inorganic growth, as Federal Bank found out when Catholic Syrian Bank launched a spirited opposition to the take over bid in the Catholic Syrian community, including through the church, arguing that any dilution would compromise the unique identity of the bank.