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The Maharashtra State Co-operative Bank Ltd., Mumbai.(Incorporating The Vidarbha Co-operative bank Ltd.)
SCHEDULED BANK
Best Practices in Corporate Governance and Loan & Pricing Mechanism in
MSC Bank
By Dr. M.L. Sukhdeve
Chairman
About MSC Bank
• More than 100 years of existence in Coop. Banking.
• Contribution to expanding cooperative movement and economic development
• Associated with sectors like
Cooperative Societies
Banks – DCCBs, UCBs
Milk processing units
Sugar factories
Spinning mills
Agro processing units
Sahakari Bhandar etc. 2
Status of MSC Bank
• Supporting 31 DCCBs through 21,000 PACS
• Around 500 Urban Banks – but away from MSC Bank in the recent past
• Around 150 Sugar Factories
• Around 35 Spinning Mills
3
4
MSC Bank in Last 25 Years
• Progressing and Supporting coop. sector
• Over a period, governance issues surfaced
• RBI imposed 11 directions in 1996
• Crises of Credibility & Trust
• Mounting NPA 32%
• Threats to Survival
• In 2011, issued requisition by RBI for superseding the elected Board.
• Appointed Board of Administrators to manage the affairs and continues till date
5
Why Failed • Business limitation - only Agri. lending • No prudential lending, practices, resulting high
NPA• Vulnerable policies • Interference in operations and manpower
management • Interference in operations • cost of resources very high• Dependency on refinance• Lack of professional staff• Result : Negative networth (-) Rs.144 crore
Losses : Rs.776 crores, NPA 32% Deposit decreased. 6
Governance Issues Identified • Clarity in Board's role, accountability and responsibilities• Prudence decision for lending and investments• Professional approach and role of members• Transparency in operations • Freedom for expressing facts by staff in the agenda notes with
specific recommendations. • Goal setting – Short term and long term for business and systems
and process• Regular Meetings – Loan Committee, Executive Committee, Board
meetings• Focus on deposits mobilisation• Disclosure in performance, future strategy and new approaches in
Board. • Redefining policies making simpler in operations.• Diversification of loan portfolio• Retail banking
7
Loan ProductsMoving with traditional loan products to new avenues.
• Take over of Term Loans of Professionals, Educational Institutions and Trust.
• Term Loan for Registered Cooperatives Housing Societies for Construction of New Building, Purchase of Building, Renovation of Old Building, Repairs
• Gruhswapnapurti Gruhkarj Yojna (Housing Loan) for Construction/ Purchase of House, Purchase of Shops.
• Micro Irrigation Scheme for Drip irrigation systems for sugarcane growers.
8
Loan Products
• Vehicle Loans ( Personal /Commercial).
• Personal Loans.
• M T loans for Small & Medium Enterprises.
• Shikhar Mortgage Loan Scheme.
• Term Loan to Urban Cooperative Banks for Purchase /
Construction of Head Office & Branch premises.
• Term Loan to Urban Cooperative Banks for computerisation
• Refinance against Housing Advances of District / Urban
Co-operative Banks.
• Co-finance Scheme with other banks.
• Pradhanmantri Awas Yojna ( Urban Area).
• Dhanwantari Medical Scheme for Hospitals and equipments.
• Loan to Urban Cooperatives against guarantee.9
Pricing Mechanism
• Margin on ST(SAO) limit to DCCBs for onlending to PACS –0.50 % above the rate prescribed by NABARD
• Margin on long term lending 0.50% - 0.60%
• Own resources for Sugars, processing units –
9.50 to 13% depending on type of loan and Risk.
10
Retail Banking Products
• On the above lines but CASA adjustment is made to keep the rate comparable with competitors.
Pricing Mechanism
11
Micro level mechanism and pricing
Average cost of fundOwn funds with 0 cost
Own funds with opportunity cost
Pricing Mechanism
Liabilities Amount % Share to total
liabilities
Cost for
Rs.100
Weighted
average
Share Capital
Reserves
Deposits
Borrowings
Other
Total
12
Assets Amount% Share to total
Assets
Income for
Rs.100
Weighted
average
Cash on hand
and Bank
Balance
Loans and
Advances
Investment
Fixed Assets
Other Assets
Total
Yield on Assets:
Pricing Mechanism
13
• Financial Margin is worked out loading with
The risk cost
Cost of management
Tax liability
Profit Margin
Pricing Mechanism
14
15
Product basedTenure of product (Repayment Period)
Rate of interest on deposits for similar tenure
Mismatch of liabilities and assets to bridge the gap in that tenure
CASA adjustment (only for retail banking)
Interest cost on CRR
Cost of operations – average with business level
Risk premium – Standard assets as per IRAC norms
Price of Break even
Profit margin
Tax liability
Lending rate is decided with risk cost for default
Pricing Mechanism
16
Change in Interest Rates
Sr. No. YearsDeposits- Interest
rates Changed
Loans and
Advances- Interest
rates Changed
1 2012-13 3 times 3 times
2 2013-14 3 times 3 times
3 2014-15 2 times 3 times
4 2015-16 4 times 3 times
5 2016-17 4 times 2 times
6 2017-18 1 time 4 times17
Impact of Corporate Governance and Pricing Mechanism:
Sr.
No.Particulars 2012-13 2013-14 2014-15 2015-16 2016-17
1 Own funds 3636 3569 3655 3492 3499
2 Deposits 15426 13475 9993 11268 16377
3 Loans &
Advances
11605 10731 12007 14424 16336
4 Gross NPA% 16.50 14.66 11.71 9.27 7.98
5 Net NPA% 1.38 1.30 0.60 0.31 0.56
6 CRAR % 10.64 14.58 16.30 15.01 14.56
7 Net Profit 391 401 411 243 24618
(144)
131
544
960
1,348
1,720
1,961 2,147
(500)
-
500
1,000
1,500
2,000
2,500
2010 2011 2012 2013 2014 2015 2016 2017
Net Worth (₹ in crore)
-1.50%
1.91%
7.35%
10.34%
14.1%
15.8%15.01%
14.02%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
2010 2011 2012 2013 2014 2015 2016 2017
CRAR (%)
19
31.22%
26.56%
21.57%
16.50%15.60%
11.70%9.27%
7.98%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
2010 2011 2012 2013 2014 2015 2016 2017
GROSS NPA (%)
13.12%
8.47%
1.84%1.70%
2.40%
0.60%0.31% 0.27%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
2010 2011 2012 2013 2014 2015 2016 2017
NET NPA (%)
20
Thank you...21
