THIRUVANANTHAPURAM: Kerala State Cooperative Bank (Kerala Bank) or Kerala Bank, is moving to boost its thinning capital buffers, as a tight capital to Risk-Weighted Assets Ratio (CRAR) threatens to stall a meaningful credit growth going forward.
Reliable sources indicate the bank has approached the Reserve Bank of India (RBI) for approval to launch a Rs300 crore long-term funding programme. This move to raise Tier-2 capital is seen as a critical lifeline to prevent the bank from breaching the regulatory 9 per cent CRAR floor, which currently stands at a precarious 9.74 per cent.
Close to 9% capital floor
With a capital fund of Rs3,840.86 crore against risk-weighted assets of Rs38,619.24 crore (as of March 31, 2025), the bank has very little headroom for traditional lending.
Under RBI norms, any aggressive expansion into commercial or retail loans – which carry higher risk weights – would immediately pull the CRAR below the mandatory 9 per cent limit.
“The only way for the bank to grow its loan book is to bring in additional capital,” a Mumbai-based veteran banker told businessbenchmark.news. “Without it, they are effectively hitting a ceiling.”
Safe haven strategy
The capital constraint seems to have forced Kerala Bank into a defensive posture. To stay compliant, the bank has pivoted heavily towards low-risk assets that do not consume much capital:
Gold loan focus: Gold loans, which carry lower risk weightings, now account for 21 per cent of the total loan book.Heavy Investment in G-Secs: More tellingly, the bank’s investment portfolio—primarily in Central and State Government securities – swelled to a massive Rs28,373 crore by the end of FY25.
While these ‘0 per cent’ risk-weight investments protect the CRAR, they often offer lower yields than direct lending, potentially squeezing the bank’s long-term profitability.
Legacy burdens
Despite these hurdles, the bank’s leadership remains undeterred. Speaking to businessbenchmark.news, P. Mohanan Master, President of Kerala Bank, dismissed concerns of a crisis.
“Kerala Bank is well placed to address the capital issue. We will evaluate our financial position after the year-end closing and do the needful. I don’t think this is a big challenge before us,” Mohanan Master stated.
However, the bank continues to grapple with legacy irritants from its pre-merger era. While it posted a net profit of about Rs25 crore in FY25, it still carries accumulated losses of approximately Rs450 crore .
Asset quality also remains a concern, with gross NPAs at 12 per cent and net NPAs at 7 per cent. Management expects to clear these negative factors within the next three to four years.
Accumulated losses
An internal source said the bank may even wipe out the whole of accumulated losses when the current year financials are out.
Beyond the 300 crore rupee debt plan, the bank is exploring a government-led equity infusion. Under current regulations, the Kerala Government can borrow from NABARD to subscribe to fresh capital.
Currently, the government holds over 42 per cent of the capital, while Primary Agricultural Credit Societies (PACS) and Urban Cooperatives hold 46 per cent.
A significant capital injection by the state, if it takes place, could potentially shift the scales, making the government the largest shareholder
