In July 2014, the Reserve Bank of India (RBI) announced a new category of banks called small finance banks with a view to disburse small-ticket loans.
The objectives of setting up of small finance banks was to further financial inclusion by (a) provision of savings vehicles, and (ii) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, through high-technology low-cost operations.
In an interview with Moneycontrol’s Hiral Thanawala, R Baskar Babu, MD & CEO of Suryoday Small Finance Bank (SSFB), talks about the bank's nearly two-year journey, challenges and opportunities for small finance banks and whether they have been able to achieve the RBI's objectives.
Q. In January 2019, your bank will be completing two years of operations. How has been the journey?
A: We believe governance and compliance play an important role in laying the foundations of a strong institution, particularly a bank. Once you have a strong foundation, growth happens.
During the transformation from an NBFC to an SFB we worked towards building strong foundations focusing on technology, governance, compliance, risks, customer experience and liabilities. During the first year of operations, we have ensured that the basics are in place, such as the integrated core banking systems, digital banking platform, a call-center and a bank branch network across five states, for delivering extraordinary customer service and satisfaction. During the second year we are focusing on increasing our footprints across by expanding our branch network.
Q. In July 2014, RBI announced a new category of banks called small finance banks with a view to disburse small-ticket loans with certain objectives. So, has your small finance bank able to meet the target?
A: As per RBI norms, small finance banks are differentiated by the structure to focus and develop expertise in terms of small ticket loans. Being a NBFC, microfinance institutions (MFIs) in past we had a good microfinance customer base which was built over the last nine years. With the banking license we see a tremendous potential to deepen relationship with our existing microfinance customers and move from being lenders to wealth creators for them.
We are in the process of converting our microfinance outlets into banking outlets, while also facilitating doorstep banking services for our customers. We are developing customised products targeted at complete financial inclusion with savings happening on one side, family being covered for any eventualities including insurance policies like life cover, personal accident insurance and health cover on the other side.
Q. Is acquiring new customers a challenge for small finance banks?
A: The banking industry has enough space for all players. Like Suryoday Small Finance Bank, all SFBs have more than a million existing customers from the under-banked segment, which is yet to explore and meaningfully use various banking services offered to them by the existing players.
The established banks are yet to fully foray deep into the microfinance segment, and their size and scale may not allow them to recognise the needs of the micro segment of the society, which is as ambitious and as much in need of regular banking services. This gap is what the SFBs can easily cater to since SFBs have strong relationships with these customers as most of the transactions are at the client’s place. We don’t see acquiring new customers as a challenge.
Q. What is your USP and core strength as compared to other small finance banks?
A: As a bank, we are focused on ensuring financial inclusion of the un-banked and under-banked bring through innovative banking practices and continue to expand our reach in states where we currently don’t have a presence.
We are offering one of the most competitive deposit rates in the industry. Currently, a savings account can get an interest rate of up to 7.25 percent, whereas, on fixed deposits, the customer can earn up to 9 percent interest rate. For senior citizens, the interest rate offered is 9.5 percent for 950 days term. In savings account, interest is credited every month on your balance whereas, in other banks interest is credited once in a quarter, half-yearly or yearly basis.
In terms of business approach, we plan to build a healthy book and in the process we want our customers to grow with us.
Q. What is the demographic profile of customers for savings account and deposits at your bank?
A: The initial build-up for deposits has not happened from the existing customer base of microfinance. It has happened from regular banking depositors. A substantial percentage of deposits are currently coming from senior citizens, since the SFBs are offering higher interest rates and doorstep banking. Then we have people in the mid 30s and 40s as our customers as well but not many young generation depositors.
Q. What type of loans do you offer to your customers and type of loans you avoid venturing into with reasons?
A: SSFB currently offers microfinance loans and small shopkeeper loans under the inclusive finance division and in the retail segment we offer unsecured and secured business loans, housing loans, commercial vehicle loan and SME loans. We are very new to the retail segment to carve out any segment that we would want to consciously avoid.
Q. How your bad loan monitoring is different from others and how will you keep a check on loan defaults?
A: All banks have a way of monitoring the portfolio and the tools for the same are dependent on the composition and mix of the portfolio.
The difference in bad loan monitoring comes with the rigour with which we review the space we are operating in, be it microfinance or retail assets.
At SSFB, we perform detailed market analytics for each product separately which helps us in identifying overheating stress in the market with lead indicators. Basis this we decide our business drive for the month, Thereby helping us reduce the possibility of defaults in future, we also review our portfolio in-depth on a regular basis to identify financial stress development if any.
To keep the defaults in check we monitor the customer stress levels in the market and note the repayment behaviour for us and others, this helps us approach the customer in a scientific manner and with a focussed strategy.
Q. How was the bank affected during demonetisation and how did it through the crisis?
A: With the government of India’s demonetisation, SSFB witnessed a decline in collection efficiencies and a subsequent deterioration in its asset quality with the gross non-performing asset (NPA) of 6.15 percent as on March 31, 2017.
The elevated credit costs also impacted the bank’s profitability with return on equity (ROE) of 4.33 percent in FY2017 and 1.95 percent in FY2018.
However, with continuous collection efforts and write-offs, the gross and net NPA was 2.94 percent and 0.84 percent, respectively, as on September 30, 2018. Further, SSFB’s strong capitalisation and good collection efficiency for post-demonetisation disbursements provide comfort in this regard.
Q. How are small finance banks able to afford higher interest rates on fixed deposits and savings account compare to giants in the banking sector?
A: As a small finance bank, we don’t have any legacies and we don’t spend much on advertising or brand building or in terms of infrastructure costs. We are trying to reduce the operating costs by optimising the size of the branch, the look and feel and not overstaffing. We are re-inventing banking to work more efficiently and save costs. So, we are able to reduce the costs of operating a bank and pass benefit to the customer with higher interest rates on deposits.
Q. Are the high-interest rates offered by small finance banks sustainable in the long run?
A: At present, we are paying 9 percent interest on deposits for 950 days whereas, commercial private and public banks are giving 7.5 percent interest (approximately). There is overall 100 -150 basis points difference when we compare with other giants in the banking sector and we are expecting this difference to remain at least for next couple of years.
We are a new bank on the block and are establishing ourselves, so the interest rate is a major USP. However, going forward, there might be a certain reduction in our deposit rates but we believe our interest rates will still be 50-75 basis points higher compared to commercial banks. We will also find other measures to reduce the cost of our operations so that we continue to pass on the benefits to our depositors.
Q. What are the challenges small finance banks face?
A: Most of the SFBs have transitioned from being a microfinance NBFCs to banks now. As a bank, you have to ensure that you have in place strong systems and processes to ensure strong compliance along with setting up a monitoring mechanism, getting the right team at the helm, developing information technology infrastructure for banking and tech enablement for providing seamless customer experience.
However, on a lighter note, the very fact that we are called as a small finance bank becomes a challenge sometimes since it leaves people confused and they assume the word finance for an NBFC lending institution. That, however, gets addressed by our branch staff when they interact with customers.