Enthused after receiving banking licence from the Reserve Bank of India (RBI) last week after more than a century of operations, Maharashtra State Cooperative Bank (MSCB) plans to diversify into corporate financing. It would thus, be reducing lending to the cooperative sector, especially sugar and spinning mills.
The 1906-founded bank has identified information technology, manufacturing and engineering, infrastructure, state electricity boards and renewable energy for funding.
This was necessitated as MSCB, which was predominantly financing cooperative sugar and spinning mills, is unable to do so in the future. Reason: its exposure to this sector has reached 34 per cent, which is close to the ceiling fixed by RBI and National Bank for Agriculture & Rural Development (Nabard).
On Wednesday, MSCB Managing Director Pramod Karnad said the entity’s responsibility has increased with the grant of the banking licence. “However, the limitations on extending finance to cooperative sugar and spinning mills in particular besides the constraints in getting margin on our lendings have led us to pursue diversification,” he said.
Karnad revealed a piquancy in the present situation. “When we borrow at 4.5 per cent from Nabard and lend at five per cent, the cost of management is not covered,” he said.
Also, the bank is “not in a position” to take more exposure towards cooperative sugar and spinning mills. “Therefore, we plan go in for corporate financing,” the MD said. “This will be done after seeking necessary approvals of the board of administrators.”
According to Karnad, the diversification is necessary to mitigate the risk of financing sugar and spinning mills, as their functioning is largely dependent on nature. The bank, though, would explore opportunities to provide funds to floriculture, sericulture, food processing and fisheries in the cooperative sector, he added.
Karnad said the bank could actively pursue lendings to the fast-rising sectors of information technology, manufacturing, infrastructure especially ports and renewable energy. “We may have to seek approvals from RBI and Nabard for providing loans for infrastructure projects,” he added.
As on March 31, 2012, the bank’s deposits stood at Rs 15,800 crore, loans at Rs 10,400 crore, investments at Rs 12,040 crore and borrowings from Nabard at Rs 3,966 crore.
The MD said the newly secured banking licence would bring in stability to the bank, brighten its image and increase the confidence of borrowers. “Further, we will now be in a position to get funds from the money market,” he noted. The bank now plans to start ATMs and other delivery channels such as SMS banking and tele banking, besides opening more branches.
The moves come at a time when MSCB is under the administrator’s rule since May 7. This was after the state government, on the recommendations of the RBI, dissolved the MSCB’s 55-member board of directors. The bank had also earned a rap from Nabard in its inspection report for 2009-10, which came quite handy for the appointment of administrators.
On Nabard’s censure for bypassing banking norms and thereby worsening the bank’s finances, Karnad said the bank had a negative networth as on March 31, 2010, as assessed by Nabard. “We had provided against NPA (non performing asset) units despite difference of opinions. Most of the sugar units are backed by the government guarantee which is unconditional. When these units turn NPA, we invoked government guarantee, but the bank did not get the funds,” he said. “The bank now has a positive net worth. Our capital-to-RWA (risk-weighted assets) ratio is more than four per cent.”
On a slew of initiatives to bring in professionalism and reforms in the MSCB’s functioning, Karnad said the bank would strengthen the credit appraisal system, which would ensure a continuous follow-up for recovery of installments. “Besides, we will put in place a post-disbursement monitoring mechanism. Therein, field officers will visit the units, carry out surprise inspections and review of the unit. They will also scrutinise the valuations of the stocks pledged to the banks,” he pointed out. “This is to avoid market risk and credit risk.”
On the disposal of distress assets, Karnad said the bank had roped in leading consultants for assistance related to due diligence of units those having NPA. Also, it will make professional valuation of plant and machinery and land. “The consultants are also assisting the bank to prepare the tender and guide in the auctioning process. So far, the bank has partially completed the process to dispose of five units comprising four sugar mills and one ginning and pressing units,” he added.
