In NPAs race, Urban Cooperative Banks are no worse than commercial banks

Major urban co-operative banks (UCBs) are no worse than commercial banks many of which are battling high levels of non-performing assets and poor profitability. 

Maharashtra's top 10 UCBs, whose audited finances are available for FY18, reported an average gross non-performing assets (GNPA) of 4.3 per cent for FY18, down from the high of 5.6 per cent of their advances in FY16. This was better than banks which had reported an average GNPA of 12.7 per cent in FY18 and 10.3 per cent in the preceding fiscal.

Three UCBs, which reported their FY19 financials, have an average GNPA average ratio of 5.6 per cent last fiscal, down from a high (average) of 5.9 per cent in FY15.

All UCBs in the Business Standard sample were profitable unlike commercial banks wherein 15 out of 34 listed banks reported net losses in FY19.

Analysts, however, raised doubts about the authenticity of numbers reported by these UCBs, as unlike banks, they are not well regulated by the Reserve Bank of India. 

"It's a surprise that UCBs reported lower bad loans ratios than banks given that the former lend to riskier borrowers given their higher cost of funds," says G Chokkalingam, founder and managing director, Equinomics Research & Advisory.

Numbers suggest that UCBs in the sample operate with wafer-thin margins compared to banks, especially in the private sector. 

For example, the average return on equity and average return on assets for UCBs are less than half of private banks and even lower than what state-run banks earn in a profitable year. UCBs in the sample reported net interest margins (NIM) – a key profitability metric for lending – of 2.3 per cent in FY18 and 1.95 per cent in FY19, less than half of that of banks which had average NIMs of 4.2 per cent last fiscal. Most importantly, while banks have reported a 30-basis points (bps) expansion in their NIMs in the last three years driven by lower cost of funds, NIMs for UCBs have either remained stagnant or contracted during this period.

The cost of funds is also significantly higher for UCBs forcing them to chase borrowers who can offer higher yields. Analysts, however, pointed out that the higher yields come along with greater risk, and expose them to defaults, especially when economic growth hits the brake.  

For example, the UCBs in our sample reported cost of funds of 6.5 per cent on an average in FY18, and 6.2 per cent last fiscal. This was 130 bps higher than the average cost of funds for banks for the two respective years. One basis points is one-hundredth of a per cent. These UCBs earned a yield of 13.8 per cent on their advances in FY18, and this was on average, nearly 130 bps higher than yields reported by banks.