Expect normalisation in MFI sector if all players adhere to industry’s code of conduct: Equitas CEO

Equitas Small Finance Bank managing director and chief executive officer PN Vasudevan.

Spelling out that Equitas Small Finance Bank could take two more years to become universal banking ready, PN Vasudevan, MD and CEO of the bank says whatever needs to be done in order to keep it ready from an asset quality perspective has been done in the June FY25 quarter and there shouldn’t be more pain to absorb on this front going ahead. Edited excerpts of the interview:

Where do things stand on applying for a universal bank license?

RBI has come out with the guidelines, and under the guidelines there is one point in which we don't qualify. In this quarter we have done a one-time correction to our provision coverage ratio, we have taken it from 55 percent to 70 percent, and because of that the net non-performing assets (NPA) has dropped from 1.15 percent to 0.8 percent. Now we will wait for two more years as net NPA should be less than 1 percent for two continuous years.

Any particular reason why you decided to be careful with your disbursements in Q1?

The first quarter is generally lower than the last quarter of every year; it's a seasonal trend. But this year’s first quarter was lower than even the normal first quarter largely because we had elections and that created some level of disturbance on the ground for us. In microfinance, there have been slippages which are at a higher level than normal. In MFI we have been a little cautious in disbursing. But the other products, basically it's only the seasonality and the election. It should be normal for the second quarter.

Standalone MFIs are getting cautious on pockets such as Tamil Nadu, Madhya Pradesh, Rajasthan, UP, Bihar, etc. What is your experience?

In microfinance, slippages have been on the higher side. What started as a problem in only a few areas has been spreading now. In Tamil Nadu, Maharashtra, Gujarat, Rajasthan, and Punjab among the areas where we operate  there have been pockets of stress.  But the question really is, what do we do, going forward? There has been a lot of dialogue at the industry level in terms of trying to bring some level of discipline into the lending side so that customer repayments and behaviour will also improve. There are three associations for microfinance - Sa-Dhan, MFIN and the Small Financial Bank Association. In all of the three associations, we have discussed and agreed upon a code of conduct for the players in the industry, and that code of conduct indicates a certain level of control in terms of the quantum of lending, number of lenders to a borrower, as well as the discipline of not lending to a borrower if the borrower is in default to someone else. The code of conduct covers all of this basic lending discipline. If we follow this code of conduct on the ground we should come back to normal, and repayments also should hopefully normalise. I'm hoping that should happen in the next three months.

Margins have corrected a little steeper compared to cost of funds. What would you attribute this to?

That is because of two factors. One is that microfinance, as a percentage of the total book, has been coming down, and that product mix change is one reason for the NIM drop. The second thing is that our CD ratio last year was about 100 percent. Now it is 86.75 percent. When you reduce CD ratio, what it really means is that you are taking more deposits and then parking some of them in government securities.

On CD ratio you have mentioned that the ratio is adjusted for the refinancing book…

The association has written to RBI requesting that refinance may be considered as part of CD ratio. We have not received a response. So that something that we cannot take as of today. But if at all RBI ever agrees to accept refinance as part of CD ratio, then the second line will be the relevant thing.

On the CASA ratio, this has been falling for you and for the industry. Is there a number where you would want to maintain it?

The reality of the market today is that there is a lot of pressure on deposits, and the fixed deposit rate is very attractive compared to a savings account rate. People are wanting to put any surplus money into fixed deposits rather than savings accounts. This is an industry wide issue and there is nothing much that any of us can do. So we will continue to work to try to improve CASA, but we will have to take it as the industry takes it.

Do you see yourself having to up your cost of deposit in order to be a little more attractive in the market?

No. As of now we are not considering that.