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Performance of assets and people

E. Kumar Sharma     November 26, 2009

They are a motley bunch, some large and some small, all winners in their category. They have two things in common: motivated people and a distaste for non-performing assets.

Going for gold

In June this year, the 14,000-odd employees of Andhra Bank took home more than just their monthly pay cheque. Each of them also got a five-gram, 24 carat gold coin. The 85-year-old bank was celebrating another milestone passed: total business (deposits plus advances) had topped Rs 1 lakh crore, upgrading its status from a small bank to a midsize one. Also, last year, it was able to hook up all its branches into the core banking system.

“It was a major transformation and we had to give back to our people something based not on hierarchy…something that everyone— a sweeper or a senior officer— could relate to,” says R.S. Reddy, Chairman and Managing Director of Andhra Bank. This year, the bank also started selling gold coins and those given to the employees had the bank’s name embossed on it.

For the purposes of this list, Andhra Bank has been a winner on the assets front: Its net nonperforming assets (NPAs) as a percentage of net advances add up to just 0.16 per cent against the industry average of 1.5 per cent. The delinquency ratio is just 0.23 per cent (which means that for every Rs 100 that it lent, only 23 paise ended up as an NPA). The industry average, Reddy says, could be around 1 per cent and is moving up.

The gross NPA as a percentage of gross advances is 0.83 per cent (industry average 2.5 per cent). The bank’s provision cover for NPAs as on September 30, 2009 was 83.66 per cent. In other words, it has set aside profits equal to 83 per cent of its gross NPAs of Rs 398 crore. So, if all its NPAs were to turn into a bad debt, Andhra Bank will have to write off only 17 per cent of the gross. (The Reserve Bank of India wants banks to provide for 70 per cent by September 2010, while the industry average is now 55-60 per cent.)

Analysts see this as a huge positive. “The bank has done quite well in terms of maintaining a good asset quality and it may not be a worry if the credit portfolio increases also as long as they have the systems in place,” says Ajay Parmar, Head, Research (Institutional Equity), at Emkay Global Financial Services.

Reddy says the focus now is to ensure that the asset quality is retained even as the credit portfolio expands. So far, the asset quality has been good because the bank has relied more on asset-based securities (or loans against collateral). But there’s a downside to this, as Reddy notes: “For smaller loans it is easy to get collateral but when your customers grow you may not be able to get matching collaterals all the time."

Once this happens, the bank has to take a call on things like the borrower’s record, the product capability, management quality, corporate governance, the strength of its balance-sheet and cash flows, Reddy notes.

But the bank is not jumping into the big, bad world just like that. In a massive talent-mapping exercise, between January and March this year, it identified around 500 chartered accountants, financial analysts and MBAs already on its payroll, trained them and put them in specialised branches created to handle large corporate lending. The lending side has been divided into verticals, and the entire operation is backed by an online tracking system.

The bank is adding branches outside its home base of Andhra Pradesh. When Reddy took over in August last year, the bank had 400 branches outside the state, bringing in 48 per cent of the total business. The 1,000-odd branches in the state brought just 52 per cent of the business. Now, it has around 500 branches outside the state, and the bank is aiming to close the current year with a total business of Rs 1.3 lakh crore and report a net profit of Rs 1,000 crore (Rs 653 crore in March 2009). What next after the five gram gold coin?
- E. Kumar Sharma

The right balance

The biggest challenge that most banks face today is to strike the right balance between growth and maintaining the quality of their assets. The Nainital Bank, a subsidiary of Bank of Baroda, seems to have done this balancing trick perfectly to enter this list of Best Banks. Even with a huge credit expansion over the last four years, the bank has a zero net NPA ratio, the lowest in the industry.

The gross NPA ratio has gone down from 1.95 per cent in 2006-07 to 1.67 per cent in 2008-09. In addition, the bank has a 100 per cent NPA coverage ratio as against 70 per cent mandated by the Reserve Bank of India.

The Nainital Bank has been shy of lending to high-risk sectors like commercial real estate and personal loans, and ensures that delinquencies are reported early and settlements reached fast. “The staff has strong linkage with local customers. It helps us avoid loading more bad loans on to the balance sheet, and act way ahead of an actual crisis,” says Animesh Chauhan, Chairman & CEO, The Nainital Bank.

While maintaining low NPA levels, the bank has recorded 14 per cent growth in credit offtake vis-à-vis 10 per cent growth by other small private banks in the past one year. Currently, priority sector advances account for over 55 per cent of its credit portfolio. The fact that the bank has been able to mobilise over 42 per cent of its total deposits through low-cost route is another remarkable factor. “In these times of intense competition, higher CASA (current and savings account) ratio has kept our net interest margin intact,” he says.

It has a comfortable capital adequacy ratio (CAR) of 14.5 per cent. In September, the bank got an infusion of Rs 30 crore via a rights issue, taking its net worth (equity plus reserves) to Rs 225 crore. “By the end of current fiscal, we are aiming at Rs 2,500 crore deposits and 20 per cent growth in advances,” says Chauhan.
- Manu Kaushik

Gunning for leadership

Federal Bank has this dream of becoming the numero uno in its home state of Kerala, and going by its scorching pace, and its attempts to buy out the small Catholic Syrian Bank, it won’t have to wait very long. Currently trailing the State Bank of Travancore, an associate of State Bank of India, Federal Bank reckons that the acquisition of CSB will prevent any rival from challenging it on its home turf.

The 65-year-old bank, headquartered at Aluva in Ernakulam district, did a business of Rs 55,000 crore last year and pocketed Rs 500 crore in net profits by achieving an enviable growth of 36 per cent. The feat has not only earned it 7th place in Business Today-KPMG’s annual survey of banks, but also the title of winner in the Productivity & Efficiency category.

The bank, however, has not been able to maintain the momentum over the last two quarters. “So far, this year has not been good. While the cost of deposits has not dropped, credit off-take has not picked up. Our immediate concern has been to increase our CASA deposits and net interest margins (NIM),” says M. Venugopalan, Managing Director & CEO. The NIM slid to 3.7 per cent at the end of the second quarter from 4.28 per cent of last fiscal. The Managing Director is betting on the next four months to reach this year’s business target of Rs 70,000 crore.

A big chunk of Federal Bank’s equity (43 per cent) is with foreign institutional investors, direct investment and non-resident Indians (NRIs). In fact, NRI deposits account for 28 per cent of its retail deposits.

Despite the good news, Federal Bank is fighting a host of challenges to grow its business to Rs 1 lakh crore by 2011. Since last year, it’s been paying handsome incentives to its staff members where they have met targets of 80 per cent and above. The scheme, Venugopalan says, has helped the bank’s goals to some extent.
- K.R. Balasubramanyam

Happy staff equals happy customers

Karur Vysya Bank treats its employees well—or they are having a good time while taking the bank to new heights. Either way, very few want to quit the bank, going by the attrition level of 3 per cent against the industry average of 12 per cent. While a quarter of its staff have been with the bank for more than 20 years, the bank also has a sizeable force of younger recruits who are very comfortable with the bank’s core banking technology software (CBS), adopted way back in 2004.

Productivity-linked cash incentives for all employees of a branch if the branch hits its targets, ex-gratia payments to all, fast-track promotions and decent pay packages have prompted people to stay on—and work.

Promotion awaits cadres at the end of a year for post graduate clerks to become officers just through an interview, and the meritorious end up heading branches in no time. For others, merit rating exams lead to promotions within three years of joining.

The migration to a CBS has helped move back-office work to specialised cells, giving branch staff more time for customer service and pushing products— and the bank to the No. 1 slot in productivity and efficiency. Unlike many banks, KVB has broken even on its technology investment.

The ratio of net non-performing assets to net advances is just 0.22, and the capital adequacy ratio is 16.01 against the Reserve Bank of India’s benchmark of 9 per cent. The bank has covered 87.29 per cent of its NPAs, against the required 70 per cent.

The bank plans to increase branch network from 320 to 350 by March 2010 and to 400 by 2011.

“The fact that 37.55 per cent of our savings bank customers are in the age group of 20-35 years bear out our futuristic yet prudent tagline of our style of functioning,” says Managing Director & CEO P.T. Kuppuswamy.
- Nitya Varadarajan

Blue-chip Strategy

In the last one year, Dhanalakshmi Bank had to really live up to its name: While other banks were sitting on cash and being extra cautious about lending, this Kerala-based private sector bank had to ensure that its lending outstripped deposits. All because it had been doing so well that its capital adequacy ratio had reached a level that was way above the safest bets. “Our bank’s business growth rate in the past year has been ahead of the industry average,” says Amitabh Chaturvedi, Managing Director & CEO. In the first half of this year too, the bank’s income grew 37 per cent to Rs 287 crore, compared to the figure for the same period of the previous year.

Now, Dhanalakshmi is looking for non-interest streams to increase its revenues sharply. It has just started merchant banking services and will soon be selling mutual fund products.

If the 82-year-old bank beat the industry trend last year, it was because of its lending strategy. It identified blue-chip companies and extended loans generously even if it had to compromise on margins. “But then, our risks are less and volumes are big,” explains Chaturvedi. The gambit has paid off and it did well on almost all parameters of growth for a bank, except for one, and you guessed it: the net interest margin (NIM). This figure was 1.91 as on September 30, 2009.

The management knows that what was a hit with blue chips may not work with the small and medium enterprises sector. “Selection of right credit and proper credit appraisals are going to be a challenge,” says the CEO. Dhanalakshmi is also a leading provider of micro-credit in Kerala and Chaturvedi claims that their lending through self-help groups has been a success, with NPAs being almost zero.

A Growth Winner in BT-KPMG annual banking survey for 2008-09, where does the bank head from here? Says Chaturvedi: “We want to be among the top five private sector banks in India by 2014 or 2015. We are on our way to execute that vision.”
- K.R. Balasubramanyam

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