Exposure to MSMEs and housing may raise NPAs: Ujjivan

The newly listed Ujjivan Financial Services reported a 78 percent hike in its net interest income in the fourth quarter of FY16.   The financial firm also saw a whopping jump of 134 percent in the net profit in FY16. Samit Ghosh, MD and CEO of the firm, said that he expects normal growth in FY17 and a 30-35 percent growth in asset under management (AUM).  The group lending segment will grow by 30 percent; MSME and housing segments by 100 percent in total, he added. Currently, the group lending constitutes about 88 percent of the overall business and once the firm starts increasing operations in MSMEs and housing segments, Ghosh expects the NPAs to go up in the years to come. The transition to a small finance bank will keep us on our toes for the next 12 months, he said. Ghosh expects operating expenses to be around 8.5 percent for the next two years. Below is the transcript of Samit Ghosh’s interview with Reema Tendulkar on CNBC-TV18. Q: FY16 has closed on a very strong growth. Your net interest income (NII) was up nearly 78 percent. Your net profits are up 134 percent for the full year. Now that you will be transitioning into a small finance bank, could you tell us what the NII and profit growth could look like for FY17? A: We have had a very good year and it is a continuation of the previous year, so it is like a purple patch for us. And right now, we are working on a transition to move into the small finance bank and that is what we will be very busy with, in the next 12 months. Q: So, will the transition hurt the kind of growth rates you have historically enjoyed? Could you give us a sense of what FY17 NII and profit growth numbers could look like? Even a broad range. A: I cannot, I do not have those numbers right now, but in terms of, we will have a normal kind of growth. We are looking for this financial year about 30-35 percent growth in our revenues. At the same time, we will be working on the transition. Q: So, about 30-35 percent revenue growth. What about your assets under management (AUM)? Would that continue at the 65 percent growth rate you enjoyed in FY16 because you got more cash after the IPO. A: Yes, what I meant is that the AUM would probably grow between 30-35 percent this year. Q: What about the net interest margins at 12.3 percent for FY16? How is it likely to trend? A: NIM, I do not think there will be too much change there. I do not think there will be major changes on the NIM. But our operating expenses which have operating expense ratio which is now down to about 7.5 may come up a little bit because of the heavy investments we are making now in terms of technology, infrastructure, people in our transformation to becoming a bank. So, we expect our operating expense cost for a period of two years to go up a little bit and then come down subsequently as the bank starts full-fledged operation. Q: Just to talk a little more about the increased expenses you will have to bear as you transition into a small finance bank, how much would the operating expense go up roughly at least for the next two years? Would it go back to the 8.5 percent that you had in FY15 or would it even exceed that? A: Possibly, it would go back to about 8.5 percent. Q: So, operating expenses should be around 8.5 percent for the next two years? A: Right. Q: Since you are increasing in scale, will that add to your risk while your gross non-performing assets (NPA) are negligible right now, just at Rs 8 crore in at least H2 of FY17. How do you expect the asset quality to pan out? A: As we grow our business, right now close to 88 percent of our business is in group lending which has a very low NPA and as we build our micro, small and medium enterprise (MSME) business and the housing business, the proportion will change in terms of group lending and the MSME business and the housing business. And that may lead to a slight increase in our NPA because in this segment, compared to the group lending segment, it would be slightly higher which we have already accounted for. Q: So, it could worsen a tad bit, but it will still be below 0.5 percent at the gross NPA level? Or what would be the upper limit that you see for the gross NPA ratios? A: We provide 1 percent actually for the group lending which is the RBI requirement for the group loans. Regardless of what our NPAs, we make a 1 percent provision and at the same time, we make a 2 percent provision for these individual loans which we give for MSME and housing. So, that is a big outer limit within which we operate. Q: Could you break up this AUM growth, the normalised growth of 30-35 percent that you see into your three key segments for group lending, MSME as well as housing AUM? Which is likely to drive growth? A: This year, the MSME and the housing business has grown almost by 100 percent over a very small base. So, that kind of growth rate will remain in that segment whereas the group lending will continue around 30 percent or something like that. Q: And housing AUM? A: I am talking about the housing and the MSME business which doubled this year virtually together.