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.
83years, 58,000 shareholders and 1.64 million customers, yet the predominantly south-based Lakshmi Vilas Bank (LVB), which wants to spread its footprints across the nation and become a strong name in the retail lending space, is not ready to take the risk of unsecured lending including credit cards and personal loans. When we heard this rare and stringently risk averse premise of doing business in the banking industry, our first assumption was that it was a joke. Obviously, it wasn’t; but be that as it may, we did realise that there was a well endowed case study in the making, and grabbed the opportunity to go through the bank’s operations and top management’s strategic intent to understand the nature of the beast.
Amazingly so, the bank’s (over) conservative approach has resulted in an unexpected 52.71% growth in operating profit in the last fiscal. This is one of the best amongst various South Indian banks. LVB’s financial results can fox even the most discerning critic. Not only did LVB’s interest income jump by 38.28% to Rs.9.09 billion in the financial year 2009-10 from Rs.6.57 billion in the year ago, its total income too grew by a strong 32.47% to Rs.10.12 billion in the last fiscal.
And then comes the paradox. If a bank is so risk averse, its NPAs should be at historic lows, right? Wrong! LVB has some of the highest and most worrying NPA levels in the banking industry. For starters, LVB has managed to reduce both its gross and net NPA levels to 4.27% and 3.31% respectively from 5.12% gross NPA and 4.11% as of March 31, 2010. But, going by industry norms, the figures are still very high. For that matter, other South Indian banks like Karur Vyasa and Catholic Syrian Bank – two which B&E covered in its previous issues – are operating at a net NPA to net advance ratio of less than 1.5%. In fact, the NPA ratio was one of the biggest reasons for a sharp 38.82% drop in LVB’s net profit last year despite the earlier mentioned income growth.
The bank, which kept aside Rs.585 million as provisions and contingencies in FY’09, had to increase the same by a mammoth 131% to Rs.1.35 billion in FY’10. However, the bank, which is now investing on process changes and credit monitoring to improve credit quality of its asset portfolio, is seemingly confident that they will be able to bring down the NPA level to below 1% within the next 18 months. P. R. Somasundaram, MD & CEO, LVB, accepted to B&E, “The bank’s credit monitoring and recovery efforts have been very reactive in the past. Now we are keen on making it highly pro-active.” But then, as Vaibhav Agarwal, VP – Research, Angel Broking points out, “Despite the negative effect on the NPA front, smaller banks like LVB still need to lend to riskier segments as this is the way they can improve their overall earnings and deposit base, leading to an overall reduction in the bank’s deposit cost.”
83years, 58,000 shareholders and 1.64 million customers, yet the predominantly south-based Lakshmi Vilas Bank (LVB), which wants to spread its footprints across the nation and become a strong name in the retail lending space, is not ready to take the risk of unsecured lending including credit cards and personal loans. When we heard this rare and stringently risk averse premise of doing business in the banking industry, our first assumption was that it was a joke. Obviously, it wasn’t; but be that as it may, we did realise that there was a well endowed case study in the making, and grabbed the opportunity to go through the bank’s operations and top management’s strategic intent to understand the nature of the beast.
Amazingly so, the bank’s (over) conservative approach has resulted in an unexpected 52.71% growth in operating profit in the last fiscal. This is one of the best amongst various South Indian banks. LVB’s financial results can fox even the most discerning critic. Not only did LVB’s interest income jump by 38.28% to Rs.9.09 billion in the financial year 2009-10 from Rs.6.57 billion in the year ago, its total income too grew by a strong 32.47% to Rs.10.12 billion in the last fiscal.
And then comes the paradox. If a bank is so risk averse, its NPAs should be at historic lows, right? Wrong! LVB has some of the highest and most worrying NPA levels in the banking industry. For starters, LVB has managed to reduce both its gross and net NPA levels to 4.27% and 3.31% respectively from 5.12% gross NPA and 4.11% as of March 31, 2010. But, going by industry norms, the figures are still very high. For that matter, other South Indian banks like Karur Vyasa and Catholic Syrian Bank – two which B&E covered in its previous issues – are operating at a net NPA to net advance ratio of less than 1.5%. In fact, the NPA ratio was one of the biggest reasons for a sharp 38.82% drop in LVB’s net profit last year despite the earlier mentioned income growth.
The bank, which kept aside Rs.585 million as provisions and contingencies in FY’09, had to increase the same by a mammoth 131% to Rs.1.35 billion in FY’10. However, the bank, which is now investing on process changes and credit monitoring to improve credit quality of its asset portfolio, is seemingly confident that they will be able to bring down the NPA level to below 1% within the next 18 months. P. R. Somasundaram, MD & CEO, LVB, accepted to B&E, “The bank’s credit monitoring and recovery efforts have been very reactive in the past. Now we are keen on making it highly pro-active.” But then, as Vaibhav Agarwal, VP – Research, Angel Broking points out, “Despite the negative effect on the NPA front, smaller banks like LVB still need to lend to riskier segments as this is the way they can improve their overall earnings and deposit base, leading to an overall reduction in the bank’s deposit cost.”
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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of K-Mart in 2005 and became the Chairman, he thought of ruling the retail world. However, recent developments at Sears Holding Corp. suggest how poorly he misread the whole scenario. At the moment, the retail giant is facing the brunt from both internal & external factors. Apart from economic slowdown, its army of 3,800 stores is dilapidating with every passing day due to rising complaints related to its stores and customer service. Edward announced massive re-organisation plan on January 22, 2008 (new organisational structure composing of five business units – operating businesses, support, brands, online and real estate).
postcard was pioneering enough. Such ideas, often hailed as proprietary of a few gifted people, predictably came from the patriarch, thereby establishing Reliance Communications (RCOM), a telecom major credited with skipping and climbing the golden ladder that leads to the world’s second fastest growing cellular market. That drew in the hordes flaunting white LG phones with blue-lit screens, which could literally be had by just walking into one of those Reliance stores better known as R-World cafes. Of course, detractors were quick to speculate that Reliance Communications would be all about price leadership and nothing more.
is an amazing company with amazing products. The only problem is that its customers don’t agree,” asserts a confident Jeff Kagan, Telecom Anaylst & Expert. Well, we don’t want to agree outrightly, but beg to add – even investors don’t! Look at its share price on NYSE. ‘Accelerating downhill’ is perhaps the only words you’d use to explain its movement; currently at $16.30 (as on December 10, 2007) – and simply sad days with its share price hitting the lowest levels in 7 years! And this was also confirmed by Gartner Inc on November 27, 2007 when it disclosed how Motorola’s mobile handset global market share had slipped to 13.1% during Q3 2007 from 20.7% during the previous year. The Gartner revelation was followed by Edward Zander’s announcement of an exit on November 30. 2007, alongwith Padmasree Warrior, the CTO – two chiefs who had led Motorola’s revival in the past.
ex-presidents. There’s no real electoral payback anticipated in supporting them. Jews and Israel-loving evangelicals dwarf any Arab lobby to the extent that it’s not even funny. President Bush is now on the exit track. And it’s time to rectify the fundamental error he had made in allowing the war-on-terror rhetoric to wrongly discredit the Palestinian national movement.
World of Warcraft, Tabula Rasa et al creating the buzz. In fact, Wikipedia lists at least fifty of them on its MMORPGs page. At the last count, there were over 10 million people across the world registered with some MMORPG. And this number is doubling every year. The addiction is allegedly far worse than drugs or junk food. So what is this attraction based on? Well, first, an online 3D virtual world allows you to hide behind the screen and be just about anybody. You can make your deepest desires come true in a virtual world. This is the single most important driving factor behind this revolution.
consumers reported a decline in spending power due to rising petrol prices. While 19% wanted to buy more fuel efficient cars, an astonishing 13% had already reduced their driving on the back of $3/ gallon gasoline prices! As a result of earlier oil shocks, consumers have increasingly adapted an ‘aftermath attitude’ and eventual demands for automobiles have sagged significantly through out the world. A total of 38,214 hybrids were sold in the American market alone in March 2008, proof that these cars are now being perceived as a value proposition that’s beyond ‘fashion’.
operations are running smoothly, one must go through the Indian example before believing the same. The scene in India is not at all enticing. Though most banks have raised their minimum annual income criteria for a credit card to Rs.1,20,000 from Rs.80,000 and the know-your-customer (KYC) norms have become more stringent, the total amount under credit cards default stands close to Rs.200 billion, data from Credit Information Bureau of India reveals. Probably such kind of data might have scared the officials at Citigroup. As during March 2008, speculations were rife that Citigroup may sell-off CitiFinancial, a NBFC, which belongs to the group. Once considered to be the most aggressive sub-prime lender in India the NBFC was forced to change its norms and issue only collateral backed loans. On the other hand Citibank has also tightened its norms for issuing credit cards and now-a-days is focussing more on financing consumer durables and two-wheelers through credit cards. In rest of the markets Citigroup is now taking a cautious approach.
as well as aggressive PE groups, there is always that theoretical chance that something more desirable for Yahoo! would emerge. It may be more an issue of Yahoo!’s management really believing that there is great upside potential if the company remains independent and not wanting to transfer that potential to Microsoft regardless of price. “If it were ever put to a shareholder vote, however, I imagine shareholders would look at the situation much differently and line up in overwhelming numbers in support of a sale to Microsoft”, feels Richard.