Monday, September 10, 2012

BANKS ON THE MOVE: LVB

Lakshmi Vilas Bank is planning to grow purely on secured lending. That kind of risk aversion is not only rare but is quite strange given the industry in which the bank operates. But does such a strategy really work? B&E runs through the bank’s top management to understand the answers. 

Seen in the background of the fact that the unsecured loans space (including credit card lending) is growing at a mind-boggling CAGR of 40% (between 2006 and 2009 as reported by RNCOS), what the Angel Broking analyst mentions seems to be pertinent.

Another usual suspect for any regional bank that forwards the ‘going national’ theory is a quick check of its number of branches. And LVB fails even the first identification parade. The bank has a small and concentrated network of just 274 branches (of those 171 are situated in Tamil Nadu alone). Given that India has above of 626 districts, LVB clearly has much to do about everything, and especially its branches. Nevertheless, the bank seems to be waking up and has already applied for 100 licenses with an aim to open up at least 60 new branches in various parts of North and West India.

Compare this plan to the fact that State Bank of India, which already is a huge bank present in most places, has planned to open above of 1000 branches in 2010-11; and you immediately start realising that perhaps LVB doesn’t realise the kind of competition they’re up against.

Moving on, logically, in such small banks where CASA deposits are low, the cost of deposits tends to be very high. LVB is no different. With CASA deposits forming only 19% of the total deposits, the bank is suffering from high deposit costs. And this is making the bank lose out to competitors in the home loan market as well. But now, in their attempts to increase the CASA base, the bank’s total deposits have grown by 23.28% in the last fiscal to Rs.90.75 billion from Rs.76.31 billion in FY’08.

Meanwhile, to strengthen the home loan segment of the bank’s portfolio, which currently forms only 3% (Rs.2 billion) of its gross advances at the end of June, 2010, LVB has firmed up plans to float a housing finance company. This will also help the bank to get rid of the drawback of non-lucrative interest rates due to high cost of funds. Apart from these, the bank has recently attempted to get into other revenue generation ventures like distribution of insurance products. For the same purpose, it has tied up with LIC and Bajaj Allianz for both life and non-life insurance products. As per the bank, these new initiatives are taking off well.

Moreover, to penetrate the masses, LVB is now working on drafting a town-wise strategy, particularly for the semi urban areas where it currently has 105 branches. Also, it is planning to raise fresh capital by diluting 40% of its equity to fuel the capital requirements for expansion and banking upon its IT expertise to gain momentum.

All said and done, when one brings push to shove, one can’t help but implore LVB to reconsider their plans to go national. With a strong regional base, and with limited capital – apart from their legacy risk aversion behaviour – a sensible Sun Tzu driven strategy could well be to decide not to expand nationally now; and live to see another day. RBI’s surveys prove that 40% of the country’s over 1.2 billion population still do not have access to banking, and a considerable lot live in southern pockets of the nation. And given the push of the UID scheme across India’s rural pockets, who knows LVB might actually end up staking its claim for the post of India’s largest (and most risk averse) regional bank.


Source : IIPM Editorial, 2012.
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