Muthoot and Manappuram grow twice as fast as banks

KOCHI: Kerala was once known for its numerous banks though the number has gradually come down over the years and now settled at just four – Federal Bank, South Indian Bank (SIB) Dhanalaxmi Bank and Catholic Syrian Bank (CSB) – the only one that is not yet listed.

But even these banks seem to be playing second fiddle to the fast growing non-banking finance companies (NBFCs) that flourish on the less risky gold loan business – at least in terms of profitability and market valuation.

Among the four, Dhanalaxmi Bank and Catholic Syrian Bank (CSB) have been in the grip of loss for the last couple of years with the former having already been moved to RBI’s prompt corrective action (PCA) category, and the CSB is rumoured to be counting down for its turn.

Barring Federal Bank, among the listed banks, both Dhanalaxmi Bank and South Indian Bank (SIB) have witnessed either a marginal increase or a drop in their market capitalization during the period between March 15, 2015 and December 31, 2017 – a period of seven quarters.

Contrary to this trend, the two listed NBFCs – Muthoot Finance and Manappuram Finance saw their market value more than double during this period, with Manappuram Finance, maybe by virtue of its relatively lower base, having more than trebled its market value. The Federal Bank’s market valuation has improved by about 60 per cent during the period under review.

The combined market capitalization of the three banks grew from Rs15,713 crore to Rs23,751 crore during this period – just over 50 per cent, whereas that of the two NBFCs surged from Rs11,039 crore to Rs24,192 crore, thus leaving the banks behind them on the combined market cap.

On the profitability front, while Dhanalaxmi, as is publicly known, has posted losses for 2014-15 as well as for the nine-month period ending December 31, 2017 at Rs241.47 crore and Rs7.7 crore respectively, both Federal Bank and South Indian Bank (SIB) failed, though marginally, to maintain the proportionate profitability for the latest period for which the financials are available – Q3, 2017-18.

The NBFCs on the other hand have staged a remarkable performance with their nine-month profits in the current year exceeding that of their full year gains of 2014-15.

Quite interestingly, Muthoot and Manappuram have achieved this feat in the financial services industry by maintaining a relatively thin balance sheet and restricting their growth to below 30 per cent during this seven-quarter-long period that we took for review. This has helped these companies enjoy a very comfortable capital adequacy ratio (CAR) all along.

However, the picture opens up a bigger reality to the public. A big chunk of the NBFC’s revenue comes from the secured gold loan business and the spread the NBFCs enjoy on this business is very high, according to industry insiders.

“Though the interest rates on paper and advertisements seem to be quite normal at about 12 per cent, the terms and conditions that sound benign from outside make sure that at the end of the day, these companies pocket a good profit – as high as 30 per cent and upwards in some cases,” said a banker.

Persons who regularly depend on NBFCs for their urgent financial needs say that banks have rendered themselves unreachable or unthinkable for the poor who seek to pawn their hard earned gold jewellery for obvious reasons.

“We have sufficient funds to lend with us, but the customers seem to be comfortable with approaching NBFCs for their financial requirements despite their higher rates,” TS Anantharaman, the chairman of Catholic Syrian Bank (CSB) once told while discussing about the loan scenario.

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