Interview | Equitas SFB in touch with RBI for a universal banking licence, says CEO PN Vasudevan

PN Vasudevan, Managing Director and Chief Executive Officer, Equitas Small Finance Bank

Chennai-based Equitas Small Finance Bank (SFB), which has on multiple occasions expressed intention to procure a universal bank license, is in touch with the banking regulator and waiting for updates on the matter, its managing director and chief executive officer (MD and CEO), PN Vasudevan told Moneycontrol on February 20 in an exclusive interview.

As part of the expansion, Equitas is planning to ramp up investment in technology, Vasudevan said, adding that the bank is confident of its lending business and sees fierce competition from major banks in mobilising deposits.

“We see fierce competition on the deposit front from major banks. On the lending side, we have a strong niche and hence, we are not concerned about it,” Vasudevan said highlighting the bank’s outlook for the coming quarters. Edited excerpts:

Also watch: Equitas SFB'S PN Vasudevan Pitches For Tech Investment, Sees Stronger Growth Ahead

What is your reading of the third quarter numbers?

We had a good third quarter, and to put things in perspective, our unsecured or microfinance loan book was previously 53 percent of total advances.

Demonetization had an impact on our microfinance book and our return on assets (ROA) went as low as 0.3 percent in March 2018. Also, during the pandemic, our financials were under stress but ROA was at 1.1 percent, not as bad as 0.3 in 2018. Post this, we have produced financial healthy quarters and reduced our unsecured loan book to 18 percent. Also, our loan book has been resilient and we expect the same going forward.

There is tough competition to garner deposits…

We’ve raised our interest rates thrice in the last two quarters. But we are trying to reduce the gap between our interest and deposit rates with that of major and universal banks. As a smaller bank, we have to offer a slightly higher rate to lure depositors to our bank.

A year back, the difference between the interest rates of major banks and our bank was 1.5 percent. But now, in the rising interest rate scenario, the difference has reduced to 1 percent as banks are increasing their deposit rates. Our bank is also raising rates but we are trying to extend them till we can.

To some extent, we have been able to manage the interest rate gap and we expect to reduce the gap further with more depositors parking funds with us.

On the lending side too, you have tough competition. What’s your strategy?

One sector where SFBs have a strong hold over fintechs and large banks is lending to informal customers. The lending process to these customers is very rigorous as they do not have proper documents. The demand for credit from small businesses is around Rs 22 lakh crore. And banks serve 4 percent of the total credit demand.

Regarding this, our bank has a very strong hold in this sector with our average loan ticket size of around Rs 6 lakh. And with this, we are creating markets and inclusive growth alongside financial inclusion.

How has the merger impacted the group?

We were waiting for regulatory approval for the merger as had it always been on our cards. The merger helped in developing a linear structure for our management as now we have only one entity. Secondly, the net worth of our bank increased with the reverse merger and this helped in increasing our earnings per share (EPS) as well.

What is the update on turning into a universal bank?

We are keen to work on this and are waiting for the regulator’s approval. This is something we have on cards, and once we get the Reserve Bank of India’s (RBI) approval, we will apply for the same.

What key challenges are SFBs facing at this point?

Our high and fixed cost model for all the operational procedures is a major challenge. Not only for our bank but for the SFB sector, the operating cost and cost-to-income ratio have been higher than major banks. And during the pandemic, we saw annual growth of 16 percent compared to 25 percent before the pandemic. This is where investments in digital and technology come in.

Leveraging technology to reduce dependence on human resources is important. And this is where we are planning to build a robust and phygital technology framework to support our costs.

Could you explain a bit more?

We see strong gross domestic product (GDP) growth next year; our inflation is slightly higher for now but the growth numbers are achievable. Globally, there are a lot of headwinds for the global economy but India, a big consumer economy, is growing.

Given this, SFBs lend to small businesses like small vendors, grocery shop owners, etc and our borrowers are resilient. Though we see higher risks in our lending portfolio, and our October-December 2022 GNPA numbers are at 3.4 percent from 2.5 percent during the pandemic, we see our GNPA numbers falling to the pre-pandemic level.

So, in general, we expect Equitas SFB and other SFBs to have a good year.