How are small finance banks faring?

Collections are up and growth is returning to micro finance industry, says Rajeev Yadav



If one were to factor in demonetisation as a one-time event, Fincare Small Finance Bank (formerly known as Disha Microfin) has not faced any major operational challenges in transitioning into a small finance bank — now a little over 100 days into its banking operations. With collections improving and growth returning, the micro finance institutions (MFI) industry as a whole is reaching a steady state, according to Rajeev Yadav, CEO, Fincare Small Finance Bank. Excerpts from a chat with BusinessLine:

With the transition of one of the largest MFIs, Bandhan, into a universal bank and eight MFIs into small finance banks, banks became the largest provider of micro credit as of June 2017. How are the dynamics of the MFI industry changing?

There have been two kinds of transformation in the MFI industry. One, many bigger MFIs have become banks. Two, banks have become highly interested in MFIs as they have emerged as a profitable way of meeting priority sector lending norms. This is due to the fact that MFIs have been able to generate healthy economic returns. Fundamentally, banks are seeing value in building an MFI portfolio through an acquired NBFC, the business correspondent (BC) model or direct sourcing route.

Post demonetisation, risks in the joint lending group model have surfaced. Do you think with banks acquiring MFIs and many others getting converted into small finance banks, there will be structural changes in the way credit is extended to this segment?

I believe that the joint lending group model is a robust model. In India, the model has been in operation for three decades and it has proved its benefits to both customers and lending institutions by offering a stable portfolio across various cycles and bringing borrowers into the banking system through the group concept.

As times evolve, there will be a better interface to technology, better integration of customers into the banking ecosystem, offering them diverse products. There will be more cashless solutions for customers. Hence, there will be more efficiency within the system.

Coming to Fincare Small Finance Bank, how has the transitioning been so far? What have been the challenges, both on the asset and liability sides?

Our transitioning has been fairly smooth, without any major operational challenges on either side. One, we are diversifying our asset side by expanding our product portfolio, such as loan against property, gold loans, institutional finance, and will also be looking to add affordable housing.

The MFI product, which was witnessing some challenges because of demonetisation, has also reached a steady state, with growth returning and collections improving.

On the liability side, we are in the roll-out phase of our branches. We have already reached a deposit base of ₹400 crore. So, in terms of product and technology roll-out, we have been on track in the first 100 days of operation as a small finance bank.

On the asset side, how will your mix be, 2-3 years down the line?

We aim to have 30-40 per cent of our loan portfolio coming from other than MF loans, two to three years hence. And MFI will predominantly follow the joint lending group model.

On the liability side, isn’t mobilising deposits a challenge, given the weak savings pattern of MFI customers? Will you have to look beyond your existing customer base to garner deposits?

We expect to raise a portion of deposits from our existing customers that have the ability to save in small amounts. But overall, this could be about 20-30 per cent of our deposits. So yes, we will have to look at a newer set of customers to fill the gap.

We have to build our distribution to reach out to new customers. We are focussing on hiring and building teams to reach out to customers, to mobilise deposits. We are also rolling out branches and technology and we are seeing good response from customers across markets.

Would you agree that for a small finance bank, as against a universal bank, the depositors and borrowers customer base will be different?

It depends on the strategy of the small finance bank. In some sense, all of us are diversifying into various products, focussing on the semi-urban market or mass market. As that happens, the deposit and the borrower segment will start to converge. That said, our belief is that people who take loans are generally poor savers. In a universal bank, hence, what helps is the fact that at least the customer segment is similar — say, for instance, salaried. This helps in better positioning and marketing. For small finance banks, hence, the customer segment will differ in the initial years. But as they diversify, the customer segments will overlap to a certain degree.

For MFIs transitioning into a small finance bank, returns were expected to moderate given the various costs of meeting regulatory requirements and branch roll-out. How has the journey been so far? When can we expect profitability to stabilise?

The costs involved in transitioning into a small finance bank were well known and part of the plan. What was not factored in was the loss on MFI portfolio on account of demonetisation.

If we leave out demonetisation as a one-time event, we are more or less on track of what we expected. While maintaining CRR/SLR has bumped up costs, funding costs have come down, on the back of substituting some of our high-cost borrowings with deposits. So, overall, we have been able to maintain our return on equity within the expected norm.

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