Karnataka Bank safe and sound

 Karnataka Bank: Safe and Resilient

The Challenge is to carry on “transformation”  

1. The Bank is safe and sound:
Karnataka Bank Ltd. (the bank), with a history of 101 years and having an existing customer base of 13.7 million, is safe and sound, if one look at its continuous profit record from the beginning and the latest financials.

The key financial parameters for the financial year ended 31^st 2025 were as under:                                                                                                                                                                        (Rupees in crores)

Parameters	FY 25	FY 24	Growth (%)
Total Deposits	104807	97988	7.0
Gross Advances	77959	73002	6.8
Total Business	182766	170990	6.9
CASA CASA to total dep(%)	33281 (31.8)	31293 (31.9)	1988 (-0.1)
Networth Captial Adequacy Ratio (CAR)	11586  19.9	10344 18.0	1242 1.9
Financial Results
Net Interest Income	3310	3299	0.4
Other Income	1270	1319	-3.8
Operating Profit	1827	2163	-15.6
Net Profit	1272	1306	-2.6
Key Ratios
Net Interest Margin (NIM)	3.19	3.52	-0.33
Return on Assets (RoA)	1.05	1.19	-0.14
Gross NPA	3.08	3.53	-0.45
Net NPA	1.31	1.58	-0.27
Provision Coverage ratio (PCR)	81.42	79.22	2.2
Liquidity Coverage ratio (LCR)	162.5
No. of Branches &  Staff	952 branches* 8700 plus staff@

*equally spread among rural, semi urban, urban & metro areas 
 @ business per employee Rs.20.9 cr.

2.  Issues that drew the attention of investors and depositors of the bank since the publication of the audit report of 31^st March 2025 on 14.05.2025

a.  Decline in the net profit for the year ended 31^st March 2025

b.  Notes to accounts to the audited financials for the year ended 31^st March 2025 mentioned that expenses (capital and revenue) aggregating Rs.1.53 cr., which were beyond the delegated powers of the whole time directors, were not ratified by the board and is recoverable from the concerned. Consequently the statutory auditors mentioned it as ‘emphasis of matter’ in their report dated 14th May 2025

c.   On 29^th June 2025, the bank issued a press release that the board of directors of the bank accepted the resignations letters (citing personal reasons) of the MD& CEO and the Executive Director (ED) (whole time directors). The release also said that the emphasis of matter in the auditor’s report ((b) above) has been discussed and amicably resolved. 

2  3.  Reasons for the decline in Net Profit and steps taken: 

(i) 70% of the advances portfolio is linked to EBLR (external bench mark lending rate), which is tied to g-sec and T-bills. The  rates of the said instruments declined by 45-50 bps in anticipation of the repo rates,  which impacted the interest revenue from the loans linked to the EBLR rates. However, the bank could not cut the deposit rates immediately in the competitive environment and since the bank was also pushing for growth in retail deposits, so as reduce its dependence on bulk deposits. Hence the net interest income was flat, though the deposits and advances grew by 7% in FY 25

    (ii) As per actuary calculations, the bank had to incur an one time                  expenditure of Rs.113 cr. towards staff superannuation benefits

   (iii) Other income was flat

   (iv) Due to the above factors, the operating profit was down by more              than 15%. However, since fresh slippages were contained, the                  provision requirements came down. Hence the bank could keep the              decline in net profit to less than 3%

During FY25, the share of retail advances, including agriculture, increased to 51%. The bank also reduced its borrowings from Rs.4399 cr. to Rs.1940 cr. as on 31st March 2025. The interest rates on deposits has also come down in line with the trend in the market. Hence the bank is expected to improve its net profit in the current FY.

4. Issues concerning 2 (b) and (c) above: 

(i) The Managing Director of the bank explained in the audio conference held with the analysts/investors on 14.05.2025 that the amounts in question were insignificant (taking into account the total expenditure of the bank) and the issue involved was the governance part. The interpretational ambiguity in the policy is since corrected. 

From the above and when one look at it independently also, the board observations were restricted only to non-ratification of the actions of the whole time directors beyond their powers. The statutory auditor also had to mention it under emphasis of matter because it found a place in the notes to accounts. 

(ii) The Chairman of the bank, in his interaction with a reputed business daily, informed that the board has already recommended the appointment of an interim MD to RBI. He also assured the investors and the bank's customers that the bank continues to be strong with a capital adequacy ratio of 19.9%, which is one and half times more than the board's mandate of 13% and much more than the statutory requirement of 11.5%. He also assured that the initiatives set in place by the existing team in the last two years will continue and the bank will grow to match the expectations of all the stake holders.

My views:

A. Transformation or Transition to new methods of banking: The old-generation private banks and the public sector banks (PSBs) have adopted several strategies to adopt themselves to the changes in the technically driven market, especially in sourcing of liabilities and funding(lending). Few years back, one of the smallest scheduled commercial bank (SCB), on receipt of funds from an overseas investor, concentrated aggressively in improving its gold loan portfolio. The outstanding under gold loans went up to 50% of its total advances at one time. It became a trend setter and the gold loan portfolio in all the SCBs saw a manifold increase and now occupies a significant share in the total advances of the banks concerned. One of the largest banks in the country saw an opportunity in personal loans to the salaried sector, which offers better returns and poses limited risks, in view of the instalments being recovered from the salary by the employer and availability of recovery data from agencies like CIBIL. The personal loans now form a sizeable portion of its total retail advances. The other PSBs followed suit. Now, with GST stabilized, small and medium units find it easy to apply for collateral free loans, as the banks are in a better position to assess their turnover and cash flows. If a bank has to survive today, it should either adopt transition (stay with its culture and adopt new changes) or transformation (change significantly). This is well understood by the PSBs and old-generation private banks.

B. Karnataka Bank: The bank appears well grounded to transform itself into the new generation of banking (dominated by digital/app based lending) and also in its efforts to broad base its MSME portfolio through its branch network (47% of its branches are in rural and semi urban areas). Its shift towards retail deposits (away from bulk deposits) should become a success in the long run, as it has 600 plus branches in its home state Karnataka, where it holds a market share of 4.1% in total deposits of the banks operating in the state. It may not be out of place to mention here that nine out of the fifteen top management professionals have been drawn from other private banks in the last two years#

#Presentation made to analysts/investors for Q4FY25

C. Way Forward: Karnataka Bank has in its board, four bankers with more than four decades of experience in banking, two chartered accountants of repute, one former principal secretary to the government of Karnataka, one former High Court Judge and a distinguished scholar as non-executive directors. Taking a cue from the developments that followed out of one fact stated in the notes to accounts, the board may do well to go through the bank's existing guidelines and make necessary changes to remove bottlenecks, if any, in its push towards transition/transformation. The persons to be appointed as whole-time directors may need that clarity and assurance, when they begin their journey with the bank.

Regards

V. Viswanathan
CGM Retd., e-SBT

6th July 2025.