Business Today
How Saraswat Bank beat the odds?

On the whole, the performance of urban co-operative banks is underwhelming. But since 2001, the total business (deposits plus advances) of Saraswat Bank grew from Rs 4,600 crore to Rs 35,000 crore as on September 30, 2012, making it the country's largest urban co-operative bank.

A Saraswat Co-operative Bank branch in Bhandup, Mumbai

A Saraswat Co-operative Bank branch in Bhandup, Mumbai Photo: Nishikant Gamre/www.indiatodayimages.com

In 2002, Hanumant Gaikwad, founder of Pune-based facilities management company BVG India, needed a loan to buy housekeeping and gardening equipment worth Rs 1 crore. It was a big amount, considering that BVG's revenues were just Rs 2 crore at the time. After five public-sector and private banks turned him away, Gaikwad went to Saraswat Co-operative Bank and met Eknath Thakur, then a director there. Thakur heard Gaikwad out and immediately sanctioned a loan without collateral. Gaikwad says of the bank: "They trust young entrepreneurs and really help them grow. That's why they are a great bank." The loan proved crucial to the growth of BVG, which closed 2011/12 with a top line of about Rs 600 crore.

Saraswat Bank's approach to business is remarkable, given the state of the urban cooperative bank (UCB) sector. Thakur says 150 UCBs are seriously distressed.

After a period of growth - from 1,307 UCBs in 1991 to 2,105 in 2004 - the sector ran into rough weather. Dilip A. Dehadraya, Managing Director of Pune-based Cosmos Co-operative Bank, India's second largest UCB, says failure to keep up with technology was a key reason for the undoing of several small UCBs. He adds that many UCBs also failed to screen borrowers thoroughly, which added to their problems.

In 2005, the Reserve Bank of India (RBI) proposed that weak UCBs be merged with stronger ones. Some UCBs shut shop, and others were merged. According to its 2011/12 annual report, the central bank has received 168 merger proposals since 2005/06, and cleared 125 of them. As of June 2012 there were 1,615 UCBs in the country, of which one-fourth were in Mumbai.

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Saraswat Bank leads the pack. Between 2006 and 2009, it acquired seven UCBs, which had a total of 87 branches. "We invested Rs 270 crore from our reserves to make their net worth positive," says Thakur. Their business has quadrupled since the acquisition. Most large UCBs have expanded through acquisitions in recent years. Indeed, they had no alternative. "After the Madhavpura scam, RBI did not issue licences for new branches till 2009, so inorganic growth was our only option," says Thakur.

He is referring to Ahmedabad-based Madhavpura Mercantile Cooperative Bank's loans to companies related to tainted stockbroker Ketan Parekh in 1999/2000, which led to a run on the bank's deposits. A restructuring plan was drawn up, but in June this year, the RBI cancelled the bank's licence. The bank had a negative net worth of Rs 1,317 crore and gross non-performing assets (NPAs) were 99.99 per cent.

Three years ago, the RBI began to issue licences again. So healthy UCBs are less keen on mergers than on organic growth. Turning around an acquired bank is not the only challenge. "The most difficult part of mergers is staff integration," says Shrinivas D. Joshi, Chief Executive of Mumbai-based Shamrao Vithal Co-operative (SVC) Bank. SVC has bought four banks.

Saraswat Bank's Thakur says that if the acquired bank is from a big city like Mumbai, the work culture is similar, which helps with integration. Even so, his bank is focusing on organic growth to increase its Rs 33,200-crore business.

"By 2016, we are looking at a total business of Rs 50,000 crore and 250 branches, and by 2020, we are targeting a business of Rs 1 trillion and 1,000 branches," says Thakur, who joined the bank's board in 1989 and was appointed Chairman in 2008. (A trillion equals 100,000 crore.) Gaikwad of BVG India credits the 71-year-old Thakur for the giant strides Saraswat Bank has taken. Thakur is a former Shiv Sena Rajya Sabha MP who also worked with the State Bank of India from 1966 to 1976 and founded the Mumbaibased National School of Banking.

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He knows a thing or two about perseverance: his 42-year fight with cancer is not over, and he recently had surgery to remove tumours from his head and neck, but he still attends office regularly. Since 2001, when he took up an active role in managing Saraswat Bank, its total business (deposits plus advances) grew from Rs 4,600 crore to Rs 35,000 crore as on September 30, 2012. This made it the country's largest UCB. Its branches quadrupled over the same period to more than 220. About a tenth of them are outside Maharashtra. In 2001, the bank's gross NPAs were 8.5 per cent, and now they are 2.9 per cent.

How did Saraswat Bank achieve this when other UCBs were floundering? After Thakur took over the reins, he and other directors met personally with borrowers who had defaulted on loans of more than Rs 1 crore. "We set up an NPA management department in 2003 and that helped us reduce bad loans," he says. Managing Director S.K. Banerji says the bank also decided to increase provisioning for NPAs. As a result, the bank has had zero per cent net NPAs for eight years now. To upgrade technology, Thakur set up Saraswat Infotech, an IT subsidiary, in 2005. "We developed our own product, which is now used by us and 40 other cooperative banks," he says.

Eknath

By 2016, we are looking at a total business of Rs 50,000 crore and 250 branches: Eknath Thakur


The bank, started in 1918, is one of many started by and for the Saraswat Brahmin community of Maharashtra and Karnataka. "There was a tendency in the community to save for a rainy day," says Thakur. The community also established SVC Bank and North Kanara Gaud Saraswat Brahmin Co-operative Bank, and played a role in setting up Syndicate Bank and Canara Bank. SVC Bank's Joshi says the community focus shrank as these banks grew. "About 99 per cent of our customers now are from other communities," he says.

Nagarajan Narasimhan, Senior Director at Crisil Ratings, notes that the numbers of most top UCBs are comparable with those of the biggest scheduled commercial banks. "Their gross NPAs are sub-three per cent, which is impressive," he says. "They are getting more competent and have good risk management practices."

Cosmos Bank's Dehadraya calls Saraswat "an aggressive UCB". He adds that their business is huge in part because most of their branches are in Mumbai." Saraswat has over 100 branches in the Mumbai metropolitan region. About 80 per cent of its loans are to small and medium enterprises and corporates. "We even take part in consortium lending," says Thakur.

Navinbhai P. Sonchatra, Chief Executive of Ahmedabad Mercantile Co-operative Bank, attributes Saraswat's continued success to its professional management culture.

An RBI-appointed committee on the licensing of new UCBs, headed by Y.H. Malegam, noted in its September 2011 report that a major problem in UCBs was nonprofessional management, which "results in relatively weak internal control and risk management systems". The report also noted that many UCBs are structurally weak, their financials often fall short of requirements, and several have a negative net worth.

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RBI governor D. Subbarao said in a November 16 speech in Pune that the cooperative ethic remains relevant. "Indeed, we have become even more aware of the value of a member-driven, grass-roots institution ... after witnessing the devastation caused by the greed and excess of the financial sector that resulted in the global financial crisis of 2008/09," he said.

Most large urban co-op banks expanded through acquisition, as no licences for new branches were issued for several years up to 2009

UCBs are either scheduled or non-scheduled. Scheduled banks - listed as such in the Reserve Bank of India Act, 1934 - must meet stricter norms than non-scheduled banks. UCBs may operate in a single state or many states. Single-state UCBs are regulated by the RBI and the State Registrar of Co-operative Societies, while multi-state ones come under the RBI and the Central Registrar of Co-operative Societies. The registrar oversees administrative aspects, such as the constitution of the Board, while the RBI oversees the banking aspects. The Malegam Committee report addresses the "problem of dual control," but SVC's Joshi sees no problem. He says: "Their roles are clearly defined, so we have never faced any issues." SVC Bank is the country's third largest UCB.

Banks such as Saraswat have many advantages. "Their size allows them to offer a wide range of services," says Sonchatra of Ahmedabad Mercantile Bank. Saraswat Bank has also had a forex licence since 1978.

But, like any other UCB, it is hamstrung by norms on raising capital. Unlike commercial banks, UCBs cannot raise funds directly from the public. "We are keen to remain a UCB, but capital constraints may force us to apply for a commercial banking licence," says Thakur. Whether or not it gets the licence, it will have to work to retain the personal touch that marks UCBs' customer service. This, says BVG's Gaikwad, is why he continues to bank with Saraswat. "You will not find that in commercial banks," he says.
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