Lending ratio (CD) falls to 59 pc; State Govt stake in bank hiked to 44 pc
By CL Jose
KOCHI/December 27-2021: The launch of the newly-created Kerala Bank or Kerala State Cooperative Bank (KSCB) was expected to have triggered a feast of loans in the state; at least a big section of the underprivileged had loved to believe so.
But the latest financials of the bank, which was a ‘guarded secret’ until recently, at least for businessbenchmark.news, belied the whole hype built behind the big brand- Kerala Bank.
Kerala Bank is a dream project for the Left Democratic Front (LDF)-led government, and so does for the chief minister, Pinarayi Vijayan as well as then finance minister, Dr Thomas Isaac.
Why does Kerala Bank that was established with the prime intention of rewriting the financial future of the marginalised section in the state has shied away from lending?
The bank that has piled up Rs66,731.61 crore in deposits, Rs7900 crore via borrowings, and boasts another Rs2787 crore – Rs2045 crore being the share capital, as its own funds or equity, has confined its lending to only Rs39,664.93 crore.
The balance sheet reveals that the same bank has channelled Rs34,035.98 crore towards investments – Rs25,412 crore in Central and State government securities and Rs8332 crore in call money market as of March 31, 2021.
A credit-deposit (CD) ratio of just 59 per cent, which the Kerala Bank currently enjoys, is way too low compared with the banking landscape in the country.
This essentially indicates that either the state doesn’t have enough takers for loans or the bank has become increasingly circumspect about giving away loans; or the bank’s capital position has been too low to carry out a meaningful lending commesurrate with its deposit base.
Counterintuitively, Kerala Bank’s loan portfolio has contracted from Rs40,156.82 crore as of March 31, 2020 (FY20) to Rs39,664.93 crore in 2020-21 (FY21) as mentioned before, even as the deposit base expanded from Rs61,037.59 crore to Rs66,731.61 crore during the said period.
To put it in perspective, the credit-deposit (CD) ratio has been falling during the past three years with the fall in CD ratio in the past year alone being more than 6 percentage points – from 65.79 per cent to 59.44 per cent.
Though the state has five other banks headquartered here – Federal Bank, South Indian Bank (SIB), CSB Bank, Dhanlaxmi Bank and ESAF Small Finance Bank, Kerala Bank was eyeing to capture to a significant market share in the state’s banking space.
Loans account for only 47 pc of total assets
As the financial year FY21 drew to a close, Kerala Bank’s loan portfolio accounted for only 47 per cent of the total assets of the bank, which was Rs83,678.09 crore.
The Rs25,000 crore investment in government securities could raise eyebrows under normal circumstances as the regulatory (RBI) requirements are far below that. The banks are obligated to keep only 18 per cent of its Net Demand and Time Liabilities (NDTL) in such securities, which could work out to about Rs14,000 crore.
Bank may need further capital
Experts point out that the bank has been caught between rock and a hard place with not much choice as far as the lending is concerned. It’s believed the small capital base in relation to its decent deposit base poses challenge to its lending ambitions as the bank needs to maintain a capital to risk-weighted assets ratio (CRAR) of 9 per cent.
The current CRAR of Kerala Bank at just over 10 per cent limits its headroom for lending, meaning that if the bank needs to grow its loan book aggressively, it has to cough up additional capital.
Nevertheless, the low capital doesn’t pose hurdles to investing in government securities as they are zero risk weighted assets by definition and hence don’t warrant capital charge, which explains the large investments in government securities.
Unless the bank generates profits from operations or the existing shareholders bring in new capital, Kerala Bank will be constrained to add more loans to its existing book.
Government holds 44 pc stake in Kerala Bank
Kerala Government, which used to hold 30 per cent of the paid-up capital of the bank at Rs495.52 crore until last financial year (FY20), has increased it by another more than Rs400 crore during 2020-21 to take its holding up to Rs947.36 crore or 43.88 per cent, with the largest shareholding at 46.12 per cent still being enjoyed by primary agricultural cooperative societies (PACS)/urban bank/Malappuram as per the details gathered from the bank’s annual report.
Restatement of accounts
The bigger question doing rounds in the market now is whether the bank will be required to restate its FY21 financial statements in the wake of the ‘qualified opinion’ made by its auditors, two years in a row.
This could have serious implication as the profit already booked by the bank is likely to turn into loss or lesser profit, predominantly taking a toll on the size of the capital with the bank getting caught up in a vicious circle.
Already, the bank has utilised the ‘profits’ earned during the past two years to downsize its accumulated loss to Rs714.27 crore.
The bank documents stated that as on November 29, 2019, the accumulated losses of Kerala Bank were to the tune of Rs1151.02 crore.
“On earning a profit of Rs374.75 crore in FY20, the accumulated losses contracted to Rs776.27 crore and further to Rs714.27 crore, thanks to the profit of Rs61.99 crore earned by it for the last financial year (FY21),” the bank said.
