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Perhaps small is more beautiful than big!

Currently in India, 17 public sector banks and one private sector bank act as  ‘parent entities’ to 56 gramin banks. These parents sponsor gramin banks by owning 35 per cent of their paid-up capital and also provide parental care by sending their chairmen and a few senior executives on deputation to the gramin banks. 

The performances of these gramin banks are contrasting. After their recent amalgamation at the state level, a few of them which were incurring losses, have become stronger and vibrant. However, among the parent banks, there are a few who are in the red because of the heavy burden of NPA. Here is a  comparative assessment of the performance of a  parent bank,  vis-a-vis a  gramin bank sponsored by it.  

The banks selected are Indian Overseas Bank and Pandyan Grama Bank. The two sets of banks are not comparable because of the operational diversities.  Gramin banks have restricted operations in their lending rates, size and amount of loans. Their areas of operations are stipulated and confined to few, selected districts in a single state. On the other hand, parent banks have the freedom to branch out to any part of the country. A major number of their branches are operating in urban and metropolitan centres. However,  a broad comparison reveals some interesting features of their performances.


IOB and its gramin...

IOB has an NPA of 13.99 per cent, one of the highest among its peers.  Juxtapose this against Pandyan Grama Bank’s nil NPA ratio. Pandyan has been presenting a nil NPA ratio for the last 13 years continuously! This zero NPA is a record, which no bank can boast. The achievement has been attained despite having a credit-deposit ratio as high as 81.40 per cent, while its recovery rate is 97.67 per cent. The NPA of IOB is Rs.19,749 crore. There has, however, been an improvement in its NPA position, as indicated in its latest Directors’ Report.

The parent bank has a total business of Rs 368,119 crore while the smaller bank has Rs.10,052 crore only as on 31 March 2017. IOB has a wider network of 3373 branches both spread all over the country and on foreign soil. Pandyan Bank has only 317 branches confined to 16 districts in Tamil Nadu. Rural branches constitute 52 per cent of the total branches of Pandyan Bank while in the case of IOB, it is only 27 per cent. Yet, the small bank has made a net profit of Rs. 74 crore, while its sponsor bank has incurred a loss of Rs.3417 crore during the year.    

Let’s look at another gramin bank in Tamil Nadu - Pallavan Grama Bank, sponsored by Indian Bank. With a smaller volume of credit lent, Rs.2904 crore, its net NPA ratio is only 0.75 percent, while the NPA of its parent bank is much higher at 4.39 per cent.


Other small banks in Tamil Nadu

Tamil Nadu has four banks in the private sector. They have been operating for a longer period than the gramin banks. The oldest of the four, City Union Bank, has a NPA ratio of 1.71 percent and its total advances are Rs. 21,112 crore. Tamilnadu Mercantile Bank is having a volume of Rs. 21,972 crore as advances, has contained its NPA ratio at 1.74 per cent. KVB’s NPA ratio is  2.53 per cent with an outstanding level of loans at Rs.41,424 crore. LVB has a slightly higher NPA ratio of 2.84 per cent for its advance level of Rs.23,729 crore. All the four banks have been able to contain their NPA ratios at ‘reasonable’ levels.    


Inferences from the comparison

One significant conclusion is that the large advances of bigger banks have increased stressed assets.  As with IOB’s  share of Rs.108 crore in the total non-performing advances of Kingfisher Airlines, most of the large loans by bigger banks have a similar story. Without generalising, it may be said that small banks have a better record of credit management. The clamour for bigger banks brings with it the risk of creating huge non-performing assets over a period. Small, perhaps is more beautiful than big! n

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