Decent finances but questionable corporate governance

Tamilnad Mercantile Bank (TMB) recently filed documents for an Initial Public Offering (IPO). It will raise funds through new shares and also conduct an Offer to Sell (OFS) for existing shareholders. The company will use a large portion of the funds raised through the IPO to stabilize its level one capital base.

TMB was founded in 1921 and is one of the oldest private sector banks in India. The bank mainly targets micro, small and medium-sized enterprises (MSMEs), agricultural clients and individuals.

In the first quarter of fiscal 2021, the bank has 509 branches, of which 369 are located in Tamil Nadu. The bank has expanded to other states as well, and Tamil Nadu contributes around 76 percent of the bank’s total deposits and advances. These states include the states of Maharashtra, Gujarat, Karnataka and Andhra Pradesh with a presence in 90 branches in these states and the remaining branches spread along other states.

The main objective of the bank is to increase its retail, agriculture and MSME activities. It has reduced its exposure to companies that operate primarily in textiles and other industries.

  • MSME: The bank mainly offers several loan products to its MSME clients operating in the manufacturing, trade and service segments. In fiscal year 2021, MSMEs contributed 39.08% of the bank’s total advances.

  • Agricultural customers: TMB offers loan products to farmers and businesses in the agricultural sector. During fiscal year 2021, agricultural customers contributed 27.41% respectively to the total of the bank’s advances.

  • Retail Customers: In this segment, the bank offers home loans, personal loans, auto loans, education loans as well as asset-backed loans of various types to retail clients. In fiscal year 2021, retail customers contributed 20.60% respectively to the bank’s total advances.

The bank has focused on smaller size loans to reduce risk and the segment of loan categories between Rs 1 lakh and Rs 5 lakh has grown at the fastest rate in the past two years. On the other hand, loans above Rs 25 lakh experienced a slight decrease.

Its total advances amount to Rs 31,541 crore in 2021, and an increase of 12% over the figure of Rs 28,236 crore the previous year. The bank’s deposit base fell from Rs 36,825 crore the previous year to Rs 40,970 crore in FY 21. It also saw a drop in gross NPA of 4.32% in FY19 to 3.44% in FY21. Overall, the company posted decent financial results.

However, investors should remember that the book profits of banking and financial companies often do not give the full picture. Bank accounting often uses estimates and management suggestions. For example, in the case of Yes Bank, the bank showed signs of improvement for a while and then almost collapsed.

Main risks:

Questionable corporate governance

In the past, the bank has repeatedly shown breaches of corporate governance. Several institutional and individual investors have also filed complaints against the bank in court, and the bank has received notices for failing to hold annual meetings with shareholders. It has been investigated by the Enforcement Directorate (ED) on several occasions, and a former director also attempted to block the IPO, alleging mismanagement.

Concentration in Tamil Nadu

The bank’s operations are heavily concentrated in Tamil Nadu, implying that any downturn in the state economy or calamity in the state could have a negative impact on the bank’s operations.

Sector risks:

The bank operates in a highly regulated industry. He already has a history of conflict with the law. In addition, the sector is very cyclical and immediately affected by macroeconomic problems.

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