RBI‘s guidelines on small finance and payments banks announced Thursday are in line with draft norms issued a few months back, says HKN Raghavan, Head - Consumer Banking at Equitas in an interview to CNBC-TV18.
RBI’s guidelines on small finance and payments banks announced on Thursday are in line with draft norms issued a few months ago, says HKN Raghavan, Head, Consumer Banking at Equitas Holdings in an interview to CNBC-TV18.
Further details on the operational risks are likely to be released by the RBI in the coming months, he adds.
RBI has allowed shortfall in Priority Sector Lending (PSL) category to be purchased from NBFCs, and PSL certificates will give a boost to fee income, he says.
Equitas has repaid Rs 2,500 crore of the Rs 3,000 crore borrowed earlier and the incremental costs of borrowing should come down consequently improving margins.
"So definitely after conversion of a small finance bank, thanks to this rating, we will be able to access the funds at a lesser cost than what otherwise we would be able to do which will have a positive impact on margins."
Below is the transcript of HKN Raghavan’s interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18.
Latha: Anything different at all in this list that will make you happy or sad?
A: More or less, if you look at it, the confirmation of the draft guidelines which were issued a couple of months back and it is in line with that. And the other thing is that the framework, the potential framework for operational risk as well as market risk is under examination and shortly probably RBI will be releasing that is actually kind of a good news. We will get a broader understanding of that particular aspect. And a couple of things, one is that if you look at it, there is the RBI has now allowed the new guidelines that for any shortfall in your priority sector lending, can be purchased from non-banking finance companies (NBFC) or banks. So, that is one. But otherwise, in terms of selling this portfolio to manage the shorter liquidity and also the Priority Sector Lending Certificates (PSLC) trading which is fee income. That side completely it has allowed. And all in all, this is more or less confirmation of the broad guidelines which were received in the past.
Latha: You expect to make a lot of money selling your priority sector certificates?
A: The priority sector certificate is one. If you look at the small finance bank, conversation from our more or less 95 percent of all or portfolio is priority sector lending. So, hence, we have been in the past also, doing this in terms of securitisation. But, this PSLC certificate definitely is much more. It will give a flip in terms of managing your fees on a positive side a lot better.
Latha: What about margins? Now even wholesale money becomes so cheap. How much has your cost of money fallen year-on-year (Y-o-Y) and how much will margins improve?
A: Currently, if you look at it, yes we have got a positive impact on the margins. As an NBFC, the average cost of funds would have been roughly around 12 percent and we are now seeing trickling in of the funds at a lower cost. And even if you had seen in the recent past, we have completely repaid the debts which we had a higher cost. So, we are in that process and more in fact, more or less, if you look at it out of Rs 3,000 crore which we had on outstanding, close to Rs 2,500 crore, we have already repaid. So definitely after conversion of a small finance bank, thanks to this rating, we will be able to access the funds at a lesser cost than what otherwise we would be able to do which will have a positive impact on margins.
On the other side, also you know that we are putting up branches and the expenses will also go up. So, it all depends on upon timing as to how do you manage the margin plus the cost. So, the execution is very important so that we positively capture this particular advantage which we would have in the coming months to come.
Latha: But you have not answered. Will margins be better?
A: Yes, definitely better.
Anuj: What about your return on equity (ROE)? If you could give us some indication of how that is going to pan out, both for your microfinance institution (MFI) business and the other business as well.
A: Now, as a small finance bank, if you look at it, as of June, the ROE was around 12.5 percent and as we move forward, we will have to wait and see how this will operationally unfold. And any future direction on ROE giving would not be fair at this point of time.
Latha: A lot of banks are buying MFI companies. Kotak Mahindra Bank bought one 100 percent. Even the little RBL Bank bought 10 percent in some MFI. Anything that we should hear at your end? Any big boys interested in you?
A: First of all, I am not too sure what would be the banks, what would be their strategy, the investment that they have done in either, taking over an MFI or investing in a small finance bank, each and every organisation must have evaluated their strategies which I am not privy to. But as of now, it is not that we are anybody is interested in Equitas, small finance bank at this point in time. We would like to run the way we are running.
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