Eyeing higher returns, Union Bank to boost lending to MSMEs, mid-corporate segments

In a bid to improve profitability, Union Bank of India is planning to step up focus on lending to businesses in the micro, small and medium enterprise (MSME) and mid-corporate segments as the lender can charge them relatively higher interest rate, leading to improvement in its net interest margin.

The public sector bank, which recorded a net profit of ₹130 crore in the first quarter ended June 30, 2018, against a net loss of ₹2,583 crore in the preceding quarter, has taken a conscious call in this regard as lending to the retail housing and top-rated corporates fetches lower margins.

Profitable segments

Given that it cannot build a business model, which is better than well-entrenched players such as HDFC, Indiabulls and ICICI Bank on the housing loans side and beat them at their own game, the bank has identified two segments – MSME and mid-corporates – as being very profitable if it does the right kind of underwriting, according to Rajkiran Rai G, MD and CEO.

“So, we are left with MSMEs and mid-corporates. If we want to be a highly profitable bank, we need to get our skills right to build our book in these two lines of business.

“We can charge slightly higher interest and make good margins in these two segments,” said the Union Bank chief in an interaction with BusinessLine .

Rai, however, stressed that his bank has been growing retail housing at a healthy pace of 15-20 per cent and by lending more to top-rated corporates (those with ‘AAA’ and AA’ ratings).

Union Bank has built 45 MSME hubs, which are independent processing engines to which local branches across the country are linked. All non-retail loans (above ₹50 lakh and up to ₹50 crore) are channelised to this hub for processing.

“The hub and spoke model for MSME lending has been designed in such a way that the right kind of business decisions can be taken. Today, scrutiny of our existing MSME portfolio (for identifying possible stress or enhancement of limits), plus new business are happening through these hubs.

“So, this is a step towards building a quality MSME portfolio. This will give us almost 3 per cent ROA (return on assets),” explained Rai.

He observed that if the bank is able to bring down its non-performing assets (NPAs) and also take quality exposure, it does not have to waste manpower in following up for recovery, thereby saving on costs.

The bank has created a separate vertical by hiving off advances between ₹50 crore and ₹150 crore, which were earlier being managed by the large corporate vertical, to a mid-corporate vertical. It has opened 25 branches under this vertical at major industrial centres across the country.

“These branches put up loan proposals directly to the mid-corporate vertical at the headquarters. This helps in quick decision-making as well as close monitoring of these accounts,” added the Union Bank chief.

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