City Union Bank reported a 16% growth in net profit for the quarter ended September 2018, due to lower provisions. Net interest income grew 12% while advances rose 17%. However, non-interest income has declined 24%. Dr. N. Kamakodi, the MD and CEO of the Kumbakonam-based bank, spoke on the lender’s focus on small and medium-sized industries and how that is a difficult market to penetrate. Excerpts:
Operating profit has seen a slump. How would you deem your overall performance?
Last year, with a lower interest rate regime, our treasury income was good. This year, we see rates moving up. Hence [there is] no opportunity of making profit from treasury. Last year, we had provided to a maximum level for bad loans — ₹87 crore in Q2 FY18, compared with ₹47 crore in Q2 FY19.
With the IBC, is the atmosphere now more conducive to recoveries on bad loans?
Our recoveries in Q2 of FY19 were about ₹66 crore, compared with ₹44 crore a year earlier. All our exposures are collateralised. We don’t lend to infrastructure projects. Traditionally, our recoveries have been in the range of 70-80%, at least at the portfolio level. Our collaterals in the form of real estate assets help recovery on loans.
Have real estate valuations begun to improve such that collaterals can be monetised?
It is better than it was two years ago. The process of recovering through mortgaged collaterals we had set in motion over this period is yielding result now. We see serious bidders participating in the process.
Compared with peers who had lent to infrastructure projects, you seem better off now with your focus on SMEs. Was it tempting to go after large corporates earlier?
Fifteen years ago, there was this trend. Earlier, as head of planning, and on the insistence of rating agencies and investors, I engaged with merchant bankers to understand what our exposures would be.
I found that the demands of the industry were such that even if one project, of which we could be a part, defaulted, our entire year’s profits could be wiped out. This was high-risk and we felt we would be better off focussing on our core competence of servicing SMEs.
How do you stave off competition from Fintech players who are eyeing this space now?
We have about a generation’s worth of experience in servicing small and medium-sized (SME) businesses. Others have lost this period of experience by not focussing on SMEs. Getting a pie of the SME market is easier said than done.
Focussed effort over at least half a decade is needed to make inroads. It is not just about rates. That alone cannot sway a borrower so easily. Interest rate is only one of say, 10 factors that help an SME borrower determine who to borrow from. The reason an SME businessman is willing to pay a premium rate to us is because we understand his business. For example, an SME business’s cash flow is not linear. Our branch manager, in consultation with his supervisors, has to make a judgement call.
How has GST impacted your SME borrowers? How does that reflect on your business?
If you look at SME borrowers, those who borrow more than ₹1 crore are part of the organised market.
Those borrowing less than ₹25 lakh are unorganised. There is grey in between. We have seen no major spike in NPAs because of the indirect tax regime. If anything, NPAs as a percentage of have declined over the past three years.