Unity Small Finance Bank is studying the affordable housing segment and may come out with a product that is rewarding in terms of yield, said Jaspal Bindra, executive chairman, Centrum Group and non-executive director of Unity Small Finance Bank. Speaking exclusively to Moneycontrol, he indicated that the bank could role out a credit card in partnership with UK's Fintech Farm . Interestingly, he also spelt out that the days of playing the rate game for deposits may be behind the bank. Edited excerpts:
How should investors view Unity Small Finance Bank — as a sum of parts or a single entity, because quite a bit of your earlier businesses has been carried forward into the bank?
Unity Bank is promoted by the Centrum Group, but is an independent, professionally managed standalone banking entity. All lending activities are housed within Unity Bank. Initially Centrum had three lending businesses – SME, microfinance and housing finance, of which MFI and SME lending have been merged with Unity Bank. Housing finance remained outside the bank due to regulatory restrictions owing to our partnership with Morgan Stanley. We eventually chose to divest our housing finance business to Weaver Services, backed by notable PE investors such Premji Invest and Lightspeed partners. Apart from that, all lending operations are now conducted within Unity Bank. The reason some refer to it as a “sum of parts” is that historically, customer segments and loan types overlapped in small finance banks. But Unity's remains as a single standalone banking entity.
How is Unity positioned today, especially with regard to loan segments?
Unity Bank started off with two lending products, but over time has transitioned into several more. Our book consists of MSME lending which accounts for close to 50% of loans. MFI book accounts for around 25%. Supply chain finance represents about 10% and SME lending is about 10–12%. Rest comes from personal loans, gold loans and credit cards. We see MSMEs graduating into SMEs and we will eventually increase exposure in that (SME) segment. Supply chain finance is also interesting because the anchor clients are large corporates, while suppliers are MSMEs or SMEs. The counterparty risk is anchored by large players, but performance risk resides with the smaller businesses. For now, we are not targeting wholesale banking.
How are you approaching personal loans and credit cards amidst concerns on asset quality?
We are taking a digital driven approach for distribution of personal loans and credit cards, thereby not restricting our reach. We are working on credit cards across customer segments, not limiting ourselves to urban, salaried customers. We offer two types of credit cards. First is an EMI based credit card co-branded with BharatPe, which appeals to small merchants and business owners. This product cuts across retail consumers looking to make large purchases and are well versed with the concept of EMIs. Second is an in-house product in collaboration with Roarbank which essentially focuses on new-to- bank and new to credit cards with little or no credit history. Our goal is to gradually build these products while ensuring that they serve underserved segments safely.
Can you share details on this partnership?
Roarbank credit card is (conceptualized as) a savings-led credit product, where users first start with a savings account and a small credit limit. Their behavior will be studied over six months, after which credit limits may be enhanced based on usage patterns without being charged separately for savings and credit components. We have taken technology from a prominent player – Fintech Farm UK. This model has been tested in markets like Nigeria, Vietnam, and Azerbaijan, and has proven successful. We’re piloting this now and have over 200,000 applicants waiting to enroll. A broader rollout is expected later this calendar year.
Now that the housing unit has been divested, will the bank enter mortgages business?
Yes, we plan to explore mortgages but selectively. The yields in prime housing are not as attractive, so we are studying segments where it makes sense. We have about six months to close the transaction. We will use this time to assess the environment and government incentives and policies, particularly around housing ownership and the gaps, to identify the right segment without compromising on returns.
With a 50:50 split between secured and unsecured loans, how do you plan to adjust this balance?
We’re comfortable with the 50:50 split for now. Over time, we expect the secured portfolio to grow. This will happen as our cost of funds decrease and legacy unsecured loans make up a smaller portion of the book. For instance, the MFI portfolio has already decreased from 40% to 25%. We are cautious and expect the share of unsecured loans to decline gradually. Our long-term target is to have 60-65% of book towards secured loans, subject to market conditions.
High deposit rates has been your strength on the liabilities front. How long do expect this trend to continue?
We were the highest (on deposit rates) till a few months back. However having built a sufficient deposit base, we’ve reduced rates. In the two-year-plus fixed deposit segment, we’ve moved from being the highest at 8% to around 6%, while others are still offering 7.5%–8.5%.
When we launched, we had a loan book but no deposit base, resulting in a very high credit-to-deposit ratio. We had to aggressively build deposits to make our mark. Today, we’re growing steadily and don't need to overpay for deposits anymore. Branch expansion and digital deposits have also helped us attract quality customers without needing to keep rates high. Unless there’s a change in the economic scenario, we don’t foresee the need to increase deposit rates in the near future.
What’s the plan on liabilities you took over from PMC Bank?
Over the next two years, we need to pay around Rs 1,000 crore. We have a reserves surplus of over Rs 2,000 crores and a five-year moratorium for some liabilities. Meeting obligations in the immediate term is not a challenge.
But at the current rates, aren’t you having an issue of negative interest rates?
It’s not a problem since we are conservatively managing credit risk. Our Treasury investments are close to our cost of funds. While the return may be modest, it remains safe.
Where do you see the yield settling as you scale?
Shifting from unsecured to secured loans will reduce spreads, but the increased volume will compensate. Even if our spread shrinks by 2%, higher loan volumes can maintain profitability. Our blended yield target is around 14%–15%.
What’s your plan on branch expansions?
We currently have over 300 branches and a bulk of expansion is done. We may add about 25 branches every year to fill gaps in certain geographies. We aim to strike a balance between physical presence and digital offerings. While not going exclusively digital, we want to increase the mix of digital transactions as it provides cost efficiencies and wider customer reach.
FY25 slippages and NPAs was quite elevated given recent credit challenges. How do you expect FY26 to be?
Gross NPA number looks inflated due to PMC Bank’s legacy loans that haven’t been written off for tax considerations. Over time, this will reduce. Historically, MSME loans hover around 2%, and we expect similar numbers going forward. MFI may be slightly higher, between 2%–3%, but we adjust provisions accordingly. SME loans are riskier due to larger ticket sizes but represent a smaller portion of the portfolio. For newer products like credit cards and personal loans, it’s too early to predict performance given their limited exposure so far.
When should we expect the IPO of Unity SFB?
We currently have a capital adequacy of around 30%, against 15% regulatory requirement. We can raise capital if needed through warrants permitted at the time of acquiring PMC Bank. This allows promoters to inject capital at par. But we have no immediate need to raise funds. We have few years before the IPO mandate kicks in; there is ample time to plan.
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