In addition, SMEs have been especially vulnerable to recent economic upheavals such as the temporary ban on high-valued currency notes in 2016, and the introduction of a nationwide goods and services tax the following year.
City Union had gross bad loans of 2.9 percent for the quarter ending December, below its regional peers and its larger Mumbai-based rivals. Meanwhile, its net interest margin of 4.4 percent puts it in the top quartile of India’s banking system.
Many of City Union’s customers are small businesses in Tamil Nadu’s textile industry, working on different parts of the supply chain from spinning and weaving to garment manufacture. The bank also lends to the retail and wholesale dealers selling anything from toothpaste to spare parts for trucks, whose shops line the streets of towns across the state.
“Unlike larger lenders, City Union does more relationship-based lending, catering to the needs of the SME borrower, which can be quite volatile,” said Pankaj Agarwal, an analyst at Ambit Capital. “That’s why they can charge a premium in this relatively untapped segment.”
Another positive is City Union’s relatively stable history at a time when faster growing lenders with similar profit numbers have sprung unpleasant surprises. Yes Bank Ltd., whose shares have dropped 47 percent over the past 12 months, has only recently resolved a leadership crisis. IndusInd Bank Ltd., down nearly 9 percent, last year disclosed significant exposure to the troubled infrastructure lender IL&FS.
Still, a smaller ratio of low-cost deposits in City Union’s liabilities compared with its peers could weigh on profits at a time when money market rates are tightening. The bank’s cost of funds rose by eight basis points in the last quarter.
But the bank has never reported a loss and has always announced a dividend in each of the previous 115 years, according to Chief Executive Officer N Kamakodi. He said the bank insists on collateral in the form of land or buildings when it lends to Tamil Nadu’s SMEs, ensuring it nearly always gets its money back.
“By nature we are a conservative bank,” Kamakodi said in an interview. “We run marathons and not 100 meter sprints.”