(More Bank) – A policy of cautious lending to silk weavers and traders in Tamil Nadu has allowed a small local bank to outstrip the largest Indian banks in terms of stock price performance.

City Union Bank Ltd., a small lender based in Kumbakonam, has grown more than 27% over the last twelve months, the best performance of all Indian lenders in the Bankex index after Axis Bank Ltd. He beat bigger competitors such as HDFC Bank Ltd. and the State Bank of India, which has been successful in providing loans to small and medium-sized enterprises, or the SME sector, while limiting bad debts.

"They are the gold standard for SME lending," said Yuvraj Choudhary, an analyst at Anand Rathi Financial Services. "They have a very good idea of ​​how small industries work in their area."

SME lending in India tends to be a higher margin business as banks can charge high interest rates, but many avoid the segment because of the difficulty in assessing risk and the risk of multiplying claims doubtful. Many of the country's banks struggle under the weight of a mountain of problematic assets, lower their stock prices and pose a threat to the Indian economy as a whole.

In addition, SMEs have been particularly vulnerable to recent economic upheavals such as the temporary ban on high-value banknotes in 2016 and the introduction of a tax on goods and services at the same time. 39, nationally the following year.

City Union had gross impaired loans of 2.9% for the quarter ending in December, a level below its regional peers and major competitors based in Mumbai. At the same time, its net interest margin of 4.4% places it in the top quartile of the Indian banking system.

Many City Union customers are small textile companies in Tamil Nadu, who handle different parts of the supply chain, from spinning to weaving, to garment making. The bank also lends to retailers and wholesalers who sell everything from toothpaste to truck parts, whose stores crisscross the streets of cities across the state.

"Unlike larger lenders, City Union offers more relationship-based lending, catering to the needs of SME borrowers, 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 element is the relatively stable history of City Union, at a time when faster-growing lenders with similar profits have sown unpleasant surprises. Yes Bank Ltd., whose shares have fallen 47% in the last 12 months, has only recently resolved a leadership crisis. IndusInd Bank Ltd., down nearly 9%, revealed a significant exposure to the troubled infrastructure lender IL & FS.

Nevertheless, a lower ratio of low-cost deposits in City Union's liabilities relative to its peers could weigh on earnings at a time when money market rates are tightening. The cost of the bank's funds increased by eight basis points in the last quarter.

But the bank has never declared a loss and has always announced a dividend in each of the previous 115 years, according to the CEO, N Kamakodi. He added that the bank insists that guarantees in the form of land or buildings be granted to SMEs in Tamil Nadu, guaranteeing that it almost always gets its money back.

"By nature, we are a conservative bank," Kamakodi said in an interview. "We run marathons and not 100-meter races."

To contact the reporter about this story: Ronojoy Mazumdar in Mumbai at rmazumdar7@More Bank.net

To contact the editors in charge of this story: Marcus Wright at mwright115@More Bank.net, Anto Antony

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