New Delhi: The sugar-cane fields in Tamil Nadu’s Cuddalore district are a long way from western Uttar Pradesh and not just in distance. Undeterred, Indian Bank, riding on the confidence of a successful public issue of equity in its centenary year, has chosen UP’s Simbhaoli to replicate a successful business model from Cuddalore where it has used relationships with local sugar farmers and technology to grow its business.
It is hoping to grow its rural credit portfolio in UP, a state where it has a relatively limited presence. To overcome the barriers of limited local knowledge and offset risks of bad loans, the bank is piggybacking on two local sugar companies to lend to sugar-cane farmers.
A key aim in moving to UP is to geographically diversify its lending, said J.M. Garg, general manager and circle head of Indian Bank in New Delhi. The bank, where the government holds majority equity, gets most of its business from south India, especially its headquarters state Tamil Nadu.
Out of Indian Bank’s 1,408 branches (end September 2006), 640 are located in Tamil Nadu. The state also accounts for 37% of the bank’s loans and advances. UP has a little less than 40 branches, said Garg.
The geographical diversification fits into Indian Bank’s larger aim of preparing for a post-2009 era, when the Reserve Bank of India plans to loosen the restrictions on foreign banks and make banks more competitive.
Indian Bank already has an alliance with Oriental Bank of Commerce, which has a large physical presence in north India, as a part of its long-term strategy. Indian Bank’s entry into sugar business in UP supplements its alliance, said K.C. Chakrabarty, Indian Bank’s chairman. Sugar, for instance, is an area where Indian Bank has vast experience. An entry into this segment would, at one stroke, supplement its alliance and ride on its traditional strength, Chakrabarty said.
Simbhaoli, about 75 km east of New Delhi and in western UP, the more prosperous region in the state, is the home of Simbhaoli Sugar Ltd. Indian Bank, Simbhaoli Sugar and the farmers supplying cane to the mill in Simbhaoli have a tripartite agreement, where the bank uses the mill to disburse credit to farmers and also as a cushion from the normal run of bad loans.
The cushion is possible as the rules that govern the sugar industry allow a monopoly of 15 km around it—a new mill cannot be set up in the radius. This makes sugar-cane farmers highly dependent on the mill located in their proximity and makes for a long standing relationship.
Simbhaoli Sugars, through which the bank will initially route Rs25 crore of credit to sugar-cane farmers, has dealt with the farmers in its catchment area for over 70 years.
For one, this makes the farmers strongly attached to the mill, said Garg. It also gives the mill knowledge of each farmer’s credit history over a long period.
The bank starts with credit disbursal at the beginning of the season. It goes to the mill which buys inputs such as seeds and fertilizer for farmers in its catchment area. Subsequently, when the cane is harvested and sent to the mill, the mill deducts the amount due to the bank and gives the balance to the farmers.
Once a bank brings an intermediary such as a sugar mill into its deal with farmers, the mill provides the bank with a cushion against loans turning bad. That is because the mill has a lien on the sugar cane the farmers grow, said Sanjay Tapriya, director (finance) and company secretary, Simbhaoli Sugar.
Simbhaoli Sugar, for instance, provides a corporate guarantee to Indian Bank that sugar cane will come in. Corporate guarantee aside, the sugar industry is one of Indian Bank’s safer credit avenues, with gross bad loans to sector standing at 0.92% of total sugar advances, against an average of 3.93%.
Indian Bank has also entered into a similar pact in UP with Dhampur Sugars Mills Ltd to disburse Rs5 crore to the sugar-cane farmers in its catchment area. The two deals in UP at Rs30 crore are a fraction of the bank’s proposed credit to the sugar industry which was Rs500 crore for 2006-07.
This exposure is not classified as corporate exposure, but as credit to individual farmers who get it at 7%—the government gives banks an additional 2% as farm loan subsidy— when Indian Bank’s prime lending rate today is 12.5%. Indian Bank’s attempt to use sugar mills as facilitators to find new areas of rural credit growth is not unique to sugar or novel among banks.
Amitabha Guha, managing director of State Bank of Hyderabad, a public sector bank, said his bank used a similar model to reach tobacco farmers in Andhra Pradesh. State Bank of Hyderabad used the Tobbaco Board as a facilitator in this case. The key is to supplement the tripartite pact between the bank, facilitator and farmers with a physical presence in the area, felt Guha.
Using a sugar mill to reach sugar-cane growers is resonant of banks going to an automobile company to finance its trade channel such as ancillaries, felt Sanjay Aggarwal, national industry director, financial services, KPMG.
The key factor is not expanding physical presence on the ground as much as creating a customer database for use in selling other products, said Aggarwal.
Here’s where Indian Bank’s UP expansion is qualitatively different from its home in Tamil Nadu. Thanks to its long-standing presence and wide reach in the state, many growers bank with it. A sugar mill supplements an existing relationship, but is not the only vehicle to reach farmers. The bank is in a better position to cross-sell products such as life insurance to rural customers—it has a pact with HDFC Standard Life Insurance Co.
The connect with rural customers in Tamil Nadu’s sugar- cane belt is “quite technology- driven,” said Garg, including use of ATMs.
In UP, Indian Bank does make an attempt to reach the farmers. In order to meet the banking regulator’s ‘know your customer’ guidelines, a sample from the farmer community picked by the sugar mill gets to meet bank officials.
Banks have little choice in using facilitators to reach customers. Opening a new branch takes time, said Garg. Currently, banks have to approach the regulator, the Reserve Bank of India, at least a year in advance to get all the clearances to start a branch.
With the government urging public sector banks to direct more credit to rural areas at every opportunity, piggybacking allows banks to get started without undue risks while they await permission to expand branches. Branch opening needs justification, felt Guha. “You open a branch to gain additional business with profitability,” he said.
Piggybacking gives a bank the initial momentum to transform physical presence into profitability. “This model will be useful elsewhere in the country. We are planning to rope in more mills (in UP),” said Garg. Regardless of how the model pans out for banks, rural customers certainly benefit, said Aggarwal. “It is a good start to reach probably cheaper credit to the farmer compared to his current sources of lending.”