Equitas gets small bank licence, prepared for yield stress

Earlier today, Equitas Holding received the final licence from RBI to set up small finance bank.

The company can now convert 70 percent or 410 of its branches into small finance banks.

In an interview with CNBC-TV18, HKN Raghavan, CEO of Equitas said that the company is adequately prepared to address the pressure on yields and it still needs to apply for 3-4 licenses, which will take around 2-3 months, before the complete rollout of the bank.

The cost of funds will decline with improvement in credit rating and operating expenses will increase by Rs 100 crore per year.Below is the verbatim transcript of HKN Raghavan’s interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18. Anuj: If you could tell us the timeline by which you will launch the bank and also the cost benefit analysis? A: We have just received yesterday the final licence. This is the first step and then second will be followed by we need to operate another 25-30 different licenses before we are ready for the complete rollout of the banking operations which will take somewhere around two to three months. So, you can expect the operations to be rolled out somewhere in the month of November-December; that is how it looks. Sonia: Once you transition to a bank, you will have to adhere to a lot of the regulations applicable to commercial banks like maintenance of the cash reserve ratio (CRR), statutory liquidity ratio (SLR), etc. How much pressure could that cause on your yields in near-term? A: I think we are adequately prepared to address this particular pressure because one is that in terms of the products that we are operating, as we know much of pressure on the yields because it is not necessary that the yield will come down drastically now because the products and customer segment that we are addressing today, is not going to change. Hence there will not be much pressure on the yields in the short-term. Anuj: The operating cost will increase but you will have the benefit of lower cost of funds. So, if you could give us some numbers in terms of cost versus benefit? A: It will be very difficult for me to give exactly what would be the kind of benefit because it is something which will take some time to tell. However, as far as the deposit mobilisation plan is concerned, we have it in place. We have our own client base which is quite large, close to 3 million clients and we expect a lot of deposits from them. Apart from that we are also looking at a business correspondents model to drive deposits in this particular segment. When we go out to the complete rollout of the branches we are looking at addressing the mass as far as the mobilisation is concerned. So, these three things all put together I think we will be able to manage the cash liquidity ratio (CLR) and SLR also. Also, the moment you get the licence, naturally the credit rating definitely will go up. Hence the cost of funds are likely to come down. So, that should be able to negate the impact of CLR and SLR. Sonia: How much could the net interest margins fall in the near-term as you transition to a bank? A: That is very difficult to tell as of now; it is very difficult give some guidance on that. Sonia: Can you just leave us with one rate on the AUM growth because so far the compounded growth rate has been solid at about more than 60 percent in the last four years. What kind of assets under management (AUM) growth are you expecting going ahead? A: As you are aware, we are operating in a segment where we have lots of opportunity whether you take used commercial vehicle or microfinance or SME that we are talking about. Hence the growth rates, there is no reason why it should not continue at similar level.