bigger is not always better

If the last credit crisis blew up a myth, it was that banks have to be bigger to survive and the small ones have to amalgamate with the giants for survival, says the chief executive of Karur Vysya Bank, which outperformed the bank index this year.

Small banks are a lot more accessible to customers and nimble and their risk-monitoring mechanism is better than the large ones, where size dilutes the focus needed to keep it under check.

“Discussions and rumours on M&A in the banking sector have always been doing the rounds,” says PT Kuppuswamy, managing director and chief executive at Karur Vysya Bank. “Recently, this theory has been shaken. There has been no tangible evidence to confirm that small banks are not profitable or that they cannot survive in the long run.”

The 2008 credit crisis that led to more than $1.5 trillion in losses for banks after Lehman Brothers collapsed proved wrong the theory that big banks would be the norm. Many economists and financial experts supported the consolidation in the banking industry prior to that. Their argument was that banks needed to have bigger balance sheets to fund acquisitions and fund trade. It was also believed that bigger banks with their financial muscle would be technologically superior, luring customers, leaving small ones battling for survival.

But many such as Karur Vysya, where billionaire Rakesh Jhunjhunwala is a stakeholder, have proved that prospects have brightened for them after the crisis.

Mr Kuppuswamy’s bank, founded in Tamil Nadu’s textile town of Karur in 1916, has proved that small is indeed beautiful with it growing nearly five-fold in nine years in terms of assets and liabilities to Rs 35,000 crore from Rs 6,500 crore when the giants have grown by 25-30% a year.

The bank founded by the local trading Chettiar community offers almost all services such as internet banking, automated teller machines, insurance and mutual fund products, rivalling new age HDFC Bank and ICICI Bank. It has been one of the best performers in the banking sector with its shares gaining 138% this year, compared with the BSE Bankex’s 48%.

The company will raise Rs 450 crore in a rights share sale improving its capital adequacy to 16%, compared with 9% mandated by RBI. Its ratio of bad loans is among the lowest in the industry at 1.67%, compared with ICICI Bank’s 5.14%.

“The net-owned funds, together with accretion of additional plough back of profits every year will take care of our capital requirements at least for a period of three years,” says Mr Kuppuswamy.

India saw its own share of banking mergers such as the Bank of Rajasthan being bought by ICICI Bank and the Centurion Bank of Punjab by HDFC Bank. But both these small banks have a history of mismanagement.

Karur Vysya, which also holds a small stake in rival Lakshmi Vilas Bank, would implement recommendations of the Boston Consulting Group to improve its low-cost deposits and increase lending to the small scale sector.

It plans to lend Rs 17,550 crore this fiscal ending March 2011, up 28.34% from Rs 13,675 crore a year earlier as the demand for loans surge in an economy where rising incomes boosts consumption.

The bank is moving to shed its regional image by expanding into other regions such as West and North and it plans to raise its staff count. “On an average, we have been adding around 300 employees under the clerical cadre and 300 under the officer cadre since the past five years,” he said.