Exclusive interview | New MFI rules will help lower lending rates: Suryoday Small Finance Bank CEO Baskar Babu

How did the second wave of COVID hit your business?

It has happened across the industry. March looked almost close to normal and in April we saw an impact across the board. The key takeaway from all segments, especially microfinance, is that the customer has not shown any deviation in behaviour in terms of intention to pay. There was a bit of uncertainty, but hopefully, with things opening up, starting from the second week of June, including in states like Tamil Nadu and Karnataka, which took very proactive measures, customers will come back. June will be a much better month than April and May. If this trend continues, July should be closer to the month of March in terms of activity coming back. The good thing is that the stress signals from the customer have not been very severe. The ability to stay in touch seems to be the key factor in getting customers back on track. This time around, there is no panic among industry players. Most of them are out there to fund their existing customers. That is what the regulator has also been nudging us to do.

Lockdowns made physical collections difficult. How did you manage the last two months?

I can only tell you what we have disclosed, as we are listed. In April, it was close to 80 percent in terms of overall collections. Thereafter, May was a little better than April. Then in June, as the trend goes, it’s looking better than the previous two months. The momentum was strong in March, in April we and our customers were taken by surprise. In June, we are back to the curve, though not fully. The momentum is very positive.

Your Q4FY21 disbursements were the highest ever. What’s the trend in the current quarter?

Yes, Q1 is not over yet. In Q4, specifically in the month of March, we did very well because there was a sense across the country that the wave is over. So yes, Q1 will not be as good as Q4 in terms of disbursements. If there is no more wave which is as severe as the second wave, in a couple of months we should be back to normal.

The RBI has proposed to remove the interest rate cap on micro loans. How will it impact the market?

The inbuilt mechanism which the regulator has put in is that the instalment obligation cannot exceed 50 percent of their income, which broadly means that based on the current income caps which are put for qualifying a customer as a microfinance customer will not be more than approximately Rs 5,000 in the rural markets and Rs 8,000 in the urban markets. What this also indicates is the household level. At the household level, irrespective of the loans that have been taken, including consumer and two-wheeler loans, will all come in, except the two categories of education and medical loans. The burden which will be imposed on the customer, earlier it was measured only by the loan outstanding. We as an entity have long believed that indebtedness should be measured by the monthly obligation. We are likely to see product innovations of loans with tenures longer than two years. The cap coming in will ensure that the competition becomes intense, especially for healthy customers. If someone prices a loan very high, it’s very likely the customer will pre-close the loan by taking another loan at a lower cost. So on a dynamic basis, the pricing will come down to an extent and the market will chase customers with a good track record.

You don’t have a significant presence in Assam, but how do you think the state government’s latest intervention in the loan waiver matter affects sentiment?

It shows that even if state governments want to do a waiver they will have to look at the holistic picture, which is what the Assam government has established. They are not just paying the customers who have defaulted and calling it a loan waiver; they’ve gone one step ahead in terms of incentives to customers who have displayed good behaviour in terms of repayments. That’s a very welcome sign. If it’s only a waiver for customers who have defaulted, then it really does no good. We have to also see the fine print, how it is going to be implemented. The new norms which the RBI is working out, if they had been in place already, then this crisis would not have happened in the first place. So with the combination of the new norms which are likely to come out in a couple of months and what the state government has announced, I think the sentiment is pretty positive.

Given that the pandemic has hit the repayment capacity of many borrowers, have you felt the need to tighten risk norms?

Not really. This gives us an opportunity to understand the customer a little more in detail. We have now started measuring in our metrics the repayment obligations of the customers at the cluster and the pincode level. More analytics will go on. The other thing the industry needs to work on and which some players are already doing, is to make more customers go digital. Earlier digitisation was not thought to be possible in microfinance, but now the customer sees the benefit. Institutions have realised this is the way to go in the long term. We must not just hold the customer to account only by their past record, but also do better profiling at the household level. That is what both the waves have taught the sector.