Maharashtra State Cooperative Bank (MSCB), which received a banking license last week after 100 years of its operations, plans to diversify into corporate financing, thereby reducing loans to the cooperative sector, especially to sugar and spinning mills. The bank has identified information technology, manufacturing and engineering, infrastructure, state electricity boards and renewable energy for providing funds. This was necessitated as MSCB, which was predominantly financing cooperative sugar and spinning mills, is unable to do so in future its exposure to this sector has reached 34% which is close to the ceiling fixed by Reserve Bank of India and National Bank for Agriculture & Rural Development (Nabard).
MSCB managing director Pramod Karnad told Business Standard, "With the grant of banking license the responsibility has increased. However, in view of limitations to keep on extending finance to cooperative sugar and spinning mills in particular and constraints in getting margin on our lendings, we have to seriously pursue diversification. In the present situation when we borrow at 4.5% from Nabard and lend at 5%, my cost of management is also not covered. Besides, we are not in a position to take more exposure towards cooperative sugar and spinning mills. Therefore, we plan go in for corporate financing. However, this will be done only after seeking necessary approvals of the board of administrators."
According to Karnad, the diversification is necessary to mitiage the risk of financing sugar and spinning mills as their functioning largely dependent on nature. He however, added that the bank would also explore opportunities to provide funds to floriculture, sericulture, food processing, fisheries in the cooperative sector.
Karnad said, "The bank can actively pursue lendings to fast rising information technology, manufacturing, infrastructure especially ports and renewable energy. However, we may have to seek approvals from RBI and Nabard for providing loans for infrastructure projects. As on March 31, 2012 bank's deposit 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."
Karnad said the grant of banking license by RBI would bring in stability to the bank, cleanse the bank's image and increase confidence of borrowers. "Further, the bank will now be in a position to get funds from the money market. The bank will start ATMs and other delivery channels such as SMS banking and tele banking. The bank will open new branches," he added.
Karnad's moves comes at a time when MSCB is under administrator's rule since May 7 after the state government on RBI's recommendations dissolved 55-member board of directors of the bank. MSCB was rapped by Nabard in its inspection report for 2009-10 which came quite handy for the appointment of administrators.
On Nabard's rap for bypassing banking norms and thereby worsening bank's finances, Karnad said the bank had a negative networth as on March 31, 2010 as assessed by Nabard. "We had provided against non performing assets (NPAs) 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. However, the bank now has a positive net worth and its Capital to Risk (Weighted) Assets Ratio is more than 4%," he noted.
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 whereby a continuous follow up for recovery of installments would be done. "Besides, the bank will also put in place post disbursement monitoring mechanism wherein field officers will visit the units, carry out surprise inspections, review of the unit. The field officers will also scrutinise the valuations of the stocks pleged to the banks. This is to aovid market risk, credit risk."
On the disposal of distress assets, Karnad informed that the bank had roped in leading consultants to assit the bank for due diligence of units those having NPA and 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 consisting of four sugar mills and one ginning and pressing unit," he added.
