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Investor education has been my single focus since I commenced my practice in 2011. It has also been my business growth driver over the years, since most of my clients come to me for advice after attending my education seminars that I conduct regularly. I conduct seminars twice a week in my office in Davangere and also have been active in Doordarshan's Kannada channel's program on investor education.
In one of the education sessions I conducted, one participant came up to me and talked to me about the Co-operative Banks Federation - an association of urban and semi-urban co-operative banks in Karnataka. The federation, based in Bangalore, was looking for trainers to educate employees and Boards of member co-operative banks. I registered with the federation as a trainer.
Training sessions for co-operative banks
In my training session for these co-operative bank staff and Board members, I decided to help them get a better understanding of their cost of funds and the need for treasury management to boost bank profitability. I started from the basics : cost of deposits + bank overheads = break even lending rate. In most cases this works out to 10% + 2% = 12%. Their regular lending was at 14% and above, giving them a spread of 2%, which appeared healthy. But what got missed out often is that 25% of deposits are to be earmarked as SLR and 4% as CRR. What is available for lending is only 71% of deposits. CRR as we know earns nothing. SLR is typically invested in government securities.
The biggest issue with these co-operative banks was the way they treated this SLR. They would typically buy G-Secs and hold them to maturity, which would give them a yield of only 7-8%. With a break even lending rate of 12%, that meant a loss of over 4% on SLR investments. The 2% spread on lending was getting eaten away by a 4% loss on SLR investments, leaving the banks with very poor profitability.
Think beyond HTM
I showed them the RBI circular which clearly says that only 25% of these SLR investments have to be in the "Hold-To-Maturity" or HTM bucket. The balance 75% can be used for treasury management - buying and selling G-Secs and making trading gains to boost overall returns. The problem was that the staff in these co-operative banks were simply not trained to conduct treasury management operations like some of the bigger banks - which is why they simply earmarked the entire SLR portfolio to HTM.
After explaining to them how to conduct simple treasury operations to boost yield, I offered to help them in an advisory capacity, in this endeavour. Some of the banks have now taken up this offer and I work closely with them on managing their G-Sec portfolios. My job is pure advisory, they do the execution. In a short period of time, I am now advising on G-Sec portfolios of these banks to the tune of around Rs.200 crores.
Role of accrual funds in co-operative bank treasuries
Staying with the idea of boosting treasury income, I then educated these banks about RBI's circular which allows upto 10% of total deposits to be invested in specified assets which include debt funds. I introduced them to accrual funds, and showcased two benefits for them:
First was that in their G-Sec portfolios, they were missing out on higher yields from corporate bonds. Corporate bond funds offered an opportunity to not only diversify their holdings, but also enhance yields. Second was the taxation aspect. In the G-Sec portfolio, all gains are taxed at corporate tax rate. I encouraged them to take a 3 year view on accrual funds and avail the significant tax benefits that come from indexation and long term capital gains tax.
On an effective post tax basis, an investment in accrual funds worked out to be just as remunerative as their normal lending activities. Their treasury need not be a drag on overall profits but can actually contribute to bank profits.
I made several presentations on the benefits of accrual funds to these banks, upto their Board level. I am now seeing increasing appetite from them. My mutual fund AuM, which was 20 crores before I started this exercise, has shot up to Rs.95 crores now, and all of this is coming into accrual funds with a 3 year investment horizon.
I am now reaching out to more such banks, in fact I am getting referrals from my existing co-operative bank clients who are very happy with this experience. 18 months ago, when I wrote on Wealth Forum, I said that my job is to keep educating and that doors will finally open. I am seeing this today in my business. My focus on education has resulted in my mutual fund AuM to come close to the 100 crore mark, and overall AuM has now crossed Rs.310 crores.
I am now creating a corporate entity for my business and will be applying for an RIA licence as soon as the company incorporation formalities are completed. I believe this structure will enable me to further scale up my service and create a separate stream of pure advisory work.
Content is created by Wealth Forum and must not be construed as an opinion by Reliance Mutual Fund.
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