Safe, not sorry: Banks prefer to back SMEs over corporates to reduce risk

They are now focusing increasingly on small and medium enterprises (SMEs) instead of chasing large corporates.

Indian Overseas Bank (IOB), Indian Bank and City Union Bank (CUB) are three such banks headquartered in the city, that are confident of seeing good outcome by trying out this formula. IOB has confirmed that slippages in the RAM (retail, agriculture, MSME) segments have been down, a trend that can help PSBs perform better. Interestingly, a targeted approach in locations such as Tirupur and Coimbatore, has helped the lenders immensely. For instance, IOB has focused on few clusters in these locations, where there are some industries, specifically engineering, automobile and textile.

“In the MSME segment, we are right now in the range of Rs 31,000 crore lending portfolio, we want to grow it to Rs 50,000 crore in the medium term of 2-2.5 years. Similarly, in home loans, we are at Rs 13,000 crore level currently and we want to make it to at least Rs 25,000 crore in the similar time frame,” said IOB MD-CEO Karnam Sekar.

The bank, which is under the RBI’s prompt corrective action (PCA) currently and has been incurring losses for the past 18 quarters, posted large losses owing to huge NPAs for the past 7-8 years, caused mainly on account of large exposure in the corporate sector.

IOB will enhance lending to MSMEs as well as give out more home loans, he added.

While the average ticket size for the retail home loan segment is targeted to be raised to Rs 25-40 lakh from the existing Rs 20 lakh, there will be special focus on growing MSME (micro, small and medium enterprise) loans by targeting textile, automobile and small industries, he added.

Sekar also said “with reduction in TAT (turnaround time) and improvement in service, we have good demand for our limited growth. In MSMEs, we have 250 branches with specialised people. We have trained almost 700-800 people and put them in these branches, they will focus mostly on MSMEs.”

Expressing hope that the bank will turn profitable soon, Sekar said “we have devised a formula-based plan so that our recovery position is further improved. Our focus on recovery is yielding good results but our target would be on growing MSME and retail portfolios.”

For Indian Bank too, this strategy seems to have worked as its MD-CEO Padmaja Chunduru said the net profit saw a surge of 62 per cent to touch Rs 247 cr for the third quarter ended December 31, 2019.

The bank’s operating profit also improved to 67 per cent and stood at Rs 1,919 cr. Advances at Rs 1,92,658 crore as of December 31, 2019, grew by 9 per cent over December 31, 2018 (Rs 1,76,864 crore). This was driven primarily by growth in retail (22 per cent) (of which housing loans – 31 per cent mortgage loans – 21 per cent and other retail loans – 25 per cent], agriculture (13 per cent), MSME (19 per cent) and supplemented by overseas advances (16 per cent). Corporate loans, however, contracted by 4 per cent YoY, data revealed.

Indian Bank’s net NPAs came down from 4.42 per cent as on December 31, 2018 to 3.50 per cent of net advances as on December 31, 2019 with a reduction of 92 bps. On the other hand, Kumbakonam-based bank CUB — which considers MSMEs to be its bread and butter — plans to continue focusing on the sector while staying away from corporate lending. Speaking to DT Next, MD-CEO N Kamakodi had recently said, “One of the main reasons for the increase in the gross NPAs for the banking sector – a lot of issues in the consortium lending, particularly both on corporate and infrastructure resulting in problems concerning project completion.”

Gross NPAs in the industry peaked at about 12-13 per cent. Now, it has reduced to 6-7 per cent, he added. “Right from the beginning, CUB decided that those exposures were well beyond its control. We did not face too many problems as we stayed away from the larger sectors. That helped us get lower incremental provisions that needed to be made,” Kamakodi said. CUB posted 8 per cent net profit in Q3.

“We do not want to branch out to the big corporate sectors anytime in future. MSMEs will continue to be our bread and butter,” he said.