Out of the 580 lending out branches currently, they expect to convert 412 into banking branches in the next 12 months, said PN Vasudevan, MD, Equitas Holdings.
Equitas Holdings, one of the first of the ten small finance banks licensees’ that listed, started its banking operations on September 5.
Out of the 580 lending out branches currently, they expect to convert 412 into banking branches in the next 12 months, said the management in an interview to CNBC-TV18.
Out of the 412 branches, fifty percent are present in South India, 30 percent in West India and 20 percent in North, while three banking branches are operational in Chennai.
PN Vasudevan, MD, Equitas Holdings said new small finance banks need to focus more on deposits and they would need to add workforce of around 3000 people, which would cost around Rs 80-90 crore each year.
The company has plans to bring down their cost of funds in the next 2-3 years.
Below is the verbatim transcript of PN Vasudevan's interview to Varinder Bansal on CNBC-TV18.
Q: Can you tell us about the size of operations?
A: We are right now lending out of 580 branches, out of that 412 will be converted into a bank branches. This 412 -- approximately 50 percent of them is in south, 30 percent in west and 20 percent in north. Right now we don’t have a preference in east.
Today is a launch of a bank, 5th September, Ganesh Chaturthi, we have just launched a bank -- three branches operational, all in Chennai but maybe in about 6-7 months we expect all the 400 branches to be up and running.
Q: Conversion is the most important thing. Do you think that the conversion from microfinance institution (MFI) to a bank will impact the profitability of the company? The growth drivers will come in next two-three years, how do you see the conversion happening in and how much pain, if at all, do you envisage?
A: As an non-banking financial companies (NBFC), we have certain level of income stream, certain level of business growth and certain structure in place and that is what we carried on in a certain manner.
As we become a bank, definitely in the short-term, there is going to be an extra cost coming on to the bank because as I mentioned, we have about 9,000 employees on the asset side. We are recruiting around 3,500 people on the liability side.
We have already 580 branches, now we are adding 400 liability branch very close to the asset branches. So the 400 new branches which are being set up, 3,500 people are going to be joining, there is obviously going to be a cost, the IT cost also -- that cost is going to come on the system and the benefit of that in terms of the cost of funds going down through the current account/saving account (CASA) and the retail term deposits (TD), that cost benefit will also come to us. The question is what is going to be the time gap between the expenses hitting us and the benefit coming into the system, there is going to be a time gap.
How much will the time gap be, that of course depends on the execution capability of the management teams and defers from bank-to-bank. So in Equitas, we will try and do our best to try and shorten the gap so that the cost and the benefit -- the gap is not very high but yes, the gap is going to be there for some time. There will be an impact, our current return on asset (ROA) is around 3.5 percent, our return on equity (ROE) is around 14 percent, leveraging is only around 3 times, our leveraging is very small.
So as we go forward, definitely our ROA should come down a bit. It should come to 2-2.5 percent but leveraging from 3 times could go up more because it is very low and as we leverage and increase our advances, leveraging should go up. ROA is a factor of how much we leverage and what is the ROA that is going to come out.
Q: What could be the possible impact on net interest margins (NIMs)?
A: On a short-term basis, NIMs could go up because we do not expect our lending rates to change immediately because the entire benefit of bank will come over two-three year period. So our lending rate may not change significantly over the next two-three years.
However, as our cost of fund should come down because currently we are borrowing from bank and our average cost is around 12 percent. That 12 percent should come down as we replace that with deposit, maybe bulk deposit -- as we replace that, their cost of funds should come down. So on a temporary basis, short-term basis, you may see our NIM going up but our operating cost is also going to go up. So our ROA may be a reduction whereas NIM goes up a little bit.
Q: You are saying the cost of funding should possibly come down from 12-12.5 percent to 9.10 percent?
A: Yes, we are looking at it in two phases. As soon as we start the bank, within a very short period of time, three months, maybe two months, within a short period of a month or two can we bring the cost down from 12 to maybe around 9-9.5, that is a phase one we are looking at.
Phase two is a more medium-term where using the entire 400 branch network and the entire retail liability staff that we are taking, whether that can contribute on CASA and TD and so phase two should be hopefully from 9-9.5 -- we should aim to go towards 7-7.5 percent over a two year period. That is when the real benefit of conversion to a bank will come, which will benefit both the customers and the shareholders.
Q: On the liability side, what is your strategy? Will you follow up Bandhan's strategy, bulk deposits, higher rates?
A: As I said, there are two phases. Phase one is from 12 percent of current cost, how they bring it down. So from that point, even 9 percent if all banks offer 8 percent for a three-year deposit, I may not mind offering 8.5 or 8.75 because for me, I am still benchmarking at my current 12 percent. So, phase one is all about how do you reduce from 12 to anything around 9-9.5 but that is a very short-term strategy.
On a long-term basis, obviously we will not be just able to keep paying very high on our deposits because that will impact my lending rate also. So over the time that will start going down but immediately that will be one of our strategies.
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