Ghosh says future growth for the firm is going to come from individual lending to the micro SME sector and housing. Finally, they plan to tie up with insurance companies to provide third party insurance.
He attributes the decline to the company's plan to invest in IT, branch infrastructure and human resource.
Ujjivan gets most of its funding from term borrowing. Its current borrowing cost is at 12 percent. But Ghosh feels that there are two factors which would help it reduce rates.
Firstly, it plans to borrow at inter-bank rates which are lower than the rates at which it currently borrows. Secondly, as the company slowly builds up its retail deposit base it will organically reduce borrowing costs.
Ghosh says future growth for the firm is going to come from individual lending to the micro SME sector and from housing. Finally, they plan to tie up with insurance companies to provide third party insurance. Group loan, which constitutes 88 percent of their business, will continue being the major contributor to their revenues.
Below is the verbatim transcript of Samit Ghosh’s interview with CNBC-TV18's Navin Shetty.
Q: I want to being by asking you the main purpose of your Initial Public Offering (IPO) was to reduce the foreign holding. So, what was the current foreign holding and maybe post the IPO what will be the foreign holding in your company?
A: Our original foreign holding was about 90 percent. We did the pre-IPO and it has come down to 77 percent. Post IPO we expected it to be somewhere around 44-45 percent.
Q: In terms of the profitability you have been doing really well. Just one thing what I wanted to ask you is you also have a primary issue. Now, this will have an impact on your overall net worth and maybe going ahead there will be an impact on the Return on Equity (RoE). So, our estimates say that our RoE might be half post the IPO.
A: Actually our ROE will be half but definitely we have to do a lot of investments in terms of IT, in terms of branch infrastructure, in terms of people. So, there will be a fair amount of cost involved. At the same time we expect our borrowing cost also to come down. But for the first couple of years of the asset we expect our RoE and Return on Assets (RoA) to drop and subsequently go back to normal.
Q: But if you could just give a timeline you might be having some timeline by when do you see it subsequently going back to those levels?
A: Our expectation is it will impact us for two years.
Q: The initial two years maybe?
A: Two years starting from the next financial year when we start operation.
Q: You are going ahead with a small banking license in the presentation or so you mentioned about it. So, it might also have an impact on your net interest margin (NIM) going ahead. So, what will be the impact on that front and how do you plan to cope up with that?
A: As far as NIMs are concerned as I told you today we do most of our funding through term borrowing. So, there our average cost is around 12 percent. So, as we go ahead there are two things which will help reduce the borrowing cost. One is the interbank rates are much lower than the borrowing cost we have today. So, that will have an immediate impact and subsequently of course as we build up our retail deposit base which takes a longer time will reduce our - this thing. So, those two together will help us to maintain our NIMs which we have at present.
Q: A few of your loans will be double finance loans. So, what is the proportion of those loans. There will be some other lenders also to your loans?
A: Reserve Bank of India (RBI) permits two Micro Finance Institutions\\' (MFIs) to lend to this thing. Today around 40 percent of our loans including us, there are two MFIs lending to the customer.
Q: Also I wanted to get details of the new products that you are launching. What kind of new products that you are looking into right now?
A: Basically we look at the future, growth is going to come mainly from our individual lending to the micro SME sector and also for housing. The group known will be solid base for us. It is 88 percent of our business. That will remain the solid base but the growth will come from our loans to the micro SMEs, individual loans and for housing. So, we are developing products for that and obviously you have the retail liabilities is something completely new for us. We have also given our all India infrastructure. We operate across 24 states and union territories. We have an excellent infrastructure for remittances given our wide customer base. So, remittance is also something we are looking at as a new product to offer. Finally, third party insurance where we tie up with insurance companies to provide third party insurance to customers.
Q: Also I want to get a sense on what is the average asset and liability duration in your loan?
A: As per the RBI regulations any loans over Rs 15,000 has to be over two years. So, roughly our average loan tenure today is about a year and half.
Q: Also in terms of your ticket size I also asked you about the new products that you are looking into. But what is the average ticket size that you are looking for the products that you will be launching?
A: Our average ticket size for the group loan is about Rs 23,000 today. But for individual loans it will be much higher, depending on whether it is housing or micro SME kind of funding, it could range anywhere between Rs 50,000 to Rs 200,000. For housing itself it could go up to about Rs 10,00,000 - 12,00,000.
Q: You have always been going ahead with social initiative in the business. Now that you will be coming to the capital markets and we all know how capital markets are you will be scrutinised on a quarterly basis. So, how do you maintain the balance going ahead?
A: The thing is we are going to convert to a bank. A bank is not a short term proposition. All our investors also have to look at us from a medium to long term perspective and just quarter-on-quarter (Q-o-Q) kind of thing is not a healthy kind of situation. So, we have to take our investors along with that to understand our business, take a longer term perspective rather than a quarterly perspective.
Q: There is competition mounting on the digital front by players like UTI and all. How do you plan to tackle it, any strategy that you have chalked out?
A: We are already pretty advanced in digital technology.