Set up in 1916, The Karur Vysya Bank (KVB) has a longstanding heritage of ethical banking practices. It has remained profitable every year since its inception, demonstrating robust financial stability and consistency. The founders had incorporated certain clauses like preventing directors from taking loans from the bank even before they were incorporated in law. Since then, the bank has maintained a culture of ethical responsibility. This vision laid the groundwork for the bank.
M.A. Venkatarama Chettiar and Athi Krishna Chettiar founded KVB 107 years ago to support traders and farmers who had suffered severely during the First World War. Starting with a seed capital of Rs 1 lakh, it has now grown into a full-fledged commercial bank offering a wide range of services.
During its long journey, the bank has successfully navigated many challenges. “Earlier when there was an infra bull, several decisions were deliberated upon regarding diversification into corporate banking. At one point, corporate banking was more than 35% of the overall book. During this period, the bank’s gross non-performing assets (NPAs) rose to 9%. Despite the challenges that came with changes in government policies, stalled projects, and other issues, the bank managed to stay afloat and mitigate the impact better than bigger banks,” says B. Ramesh Babu, KVB’s MD and CEO.
This prompted it to initiate changes to improve its performance. “These transformations included verticalisation, with the creation of specific corporate banking units that could focus on significant customers, the creation of positions such as relationship managers and credit analysts, and the introduction of business banking units,” says Babu.
Growth Strategy
The bank’s performance speaks volumes. In FY23, KVB’s total business grew 12% over the previous year to Rs 1,40,806 crore, surpassing all previous records; the bank also achieved its highest-ever net profit of Rs 1,106 crore, showing a remarkable 64% year-on-year growth. Net interest income grew 23.3% to Rs 3,349 crore compared to Rs 2,716 crore in FY22. Despite operating in a highly competitive environment, the bank’s net interest margins (NIM) in FY23 increased by 46 basis points to 4.18%. This helped KVB emerge as the Best Small Indian Bank in the BT-KPMG Best Banks and NBFCs Survey 2022-23.
Through a disciplined strategy focussed on reducing slippages, higher recovery, and an aggressive collection strategy, KVB successfully reduced its net NPAs by 156 basis points to 0.74% in FY23. The provision coverage ratio stood at a robust 92.14%, with a total capital to risk-weighted assets ratio of 18.56%, providing a comfortable buffer for growth. The bank’s agri-portfolio credit offtake rose 18% due to its direct lending strategy, involvement of branches in gold loans for farmers, and government schemes. The 16% growth in retail advances was primarily driven by demand for home and mortgage loans.
With credit growth likely in the high teens and modest credit costs, KVB’s earnings are expected to be strong in the coming quarters, says brokerage Anand Rathi in a report.
“KVB has overcome tough times to deliver strong results. Its gross non-performing loans and net non-performing loans in Q3FY24 are at the lowest level in a decade. The bank seems reasonably positioned to deliver sustained return ratios in FY25, with an expected return on assets of 1-5% and a return on equity of 15%,” says Elara Capital in its recent quarterly update.
One of the changes KVB pursued was digitalisation, especially in loan origination and documentation. “This ensured higher-quality loans and a decisive drop in the bank’s stress portfolio from 6-7% to now under 1%,” says Babu.
Competition Ahead
Small finance banks (SFBs), according to Babu, may not present significant competition to KVB’s business models since the risks they each take are different. SFBs typically function with high operating costs, with yields and advances in the range of 15-17%. But that is not the case with KVB.
But as major corporations like Jio and Piramal foray into MSME lending, KVB must adapt quickly. Babu is optimistic, asserting that big companies would struggle to offer loans at rates below 10.5%. “We are lending at 9.5-10%. Can they lend to their borrower at 10.5%? Because they have to add their operating costs, their profit margins... with all these things, they [will] try to lend at 16-18%, so it is more or less like what the SFBs are doing,” he explains.
Babu is keenly aware of the current buzz around artificial intelligence (AI) and its potential to improve customer experience. Although the century-old bank has started utilising AI in its chatbot, it acknowledges that it is still in the early stages, and is exploring AI solutions to improve the overall customer journey.
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