The impact of demonetisation and the preparations for GST
At Mint’s Annual South India Banking Conclave on 2 June, executives from small finance banks and microfinance institutions came together to discuss the challenges and opportunities faced by the sector. Small finance banks offer basic banking services, accepting deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries, and entities in the unorganized sector.
Ujjivan Small Finance Bank Ltd managing director (MD) and chief executive officer (CEO) Samit Ghosh; Equitas Small Finance Bank Ltd MD and CEO P.N. Vasudevan; Microfinance Institutions Network CEO Ratna Vishwanathan; Disha Microfin Pvt. Ltd chief executive Rajeev Yadav; and Gayathri Parthasarathy, senior partner and vice-president, global business services, financial services sector at the India unit of International Business Machines Corp., took part in a discussion on “The big dream of small finance banks” moderated by Tamal Bandyopadhyay, consulting editor at Mint. Edited excerpts:
Even though you are a small finance bank, you are subjected to higher capital requirements. Are you fine with the regulations?
Ghosh: Small finance banks (SFBs) are specialized institutions, we have the objective of financial inclusion. We have already got a set of norms which we have to comply with like 75% priority sector lending, etc. As we progress as a bank, there are a different set of challenges which we are going to face. It is very important to have a constant dialogue with the regulator. As an example, we all are going to become members of the state-level bankers committee—it assigns various targets for regular commercial banks. Our portfolio is already 100% priority sector loans (PSLs); to that extent things have to be modified. Loans on our book should automatically be classified as PSLs.
Is there any other example in your mind, Vasudevan?
Vasudevan: SFBs are small... Many people believe that the word small is a reflection of the word bank and not the word finance. Many people call us Equitas Small Bank. It is reflected in the guidelines you see, Rs100 crore capital we need and commercial banks need Rs100 crore....We have (to meet) 75% PSL, it is very onerous.
For people like us, there is no problem. Second part is 50% of portfolio is less than Rs25 lakh, these are the two defining characteristics of an SFB. We have no problems with it. The question is should I aspire to be a small bank or be a big bank?
Suppose you have capital of more than Rs500 crore, can you be given the flexibility of a universal bank? We all have invested heavily in technology. We are also filing periodical returns, the only difference is that we are in Basel II (banking norms, less onerous than Basel III).
Rajeev, both Ujjivan and Equitas are up and running; they are also listed. What are the challenges in setting up a small finance bank?
Yadav: We got a final licence in mid-May and we will be commencing (operations) in early July. Challenges are many... IT (information technology) takes a little longer, that bit is a short-term challenge. It is not easy to hire in cities other than the established ones.
I think right now we are learning from the experience of others. Meeting regulatory compliance in the short term will be a big transition step. Asset mix will change to more secured funds. All these aspects become a challenge; on a stand-alone basis it is workable.
What are the concerns you have in terms of challenges?
Parthasarathy: Moving to the next era, it is more to do with not customer segments, but customer experiences. It is more to bring customers on board. There is a lot of trust that needs to be built. Security will be a very important area which needs to be focused on, which will come from many other threats as expansion continues.
All of you suffered from demonetisation, we saw the (loan) collection rate drop to low levels. The goods and services tax (GST) is knocking at the doors. How will it impact your small and medium enterprise business?
Vasudevan: Traditionally, we operate at an NPA (non-performing asset) ratio of 1% and annual provisioning is at 6 or 7%...NPAs shot up to the 5-7% level post-demonetisation. Microfinance cannot operate at this level and we cannot call this the new normal.
Nobody can predict at what level NPAs will remain... In two quarters you make 100% provision, in our case. Amount of NPAs is almost equal to one year’s profit in our case. If I have to make one-year profit provision in two quarters’ time frame, it will severely impact my financials.
The reality is not as bad as it is being projected. What is being done to alleviate the pain? On GST, is there any industry-wide action you are taking so that small finance banks are not faced with inconvenience?
Vishwanathan: We did an enormous amount of work, challenges were several... when it came, it was tough dealing with it. Geographies that are displaying this behaviour are not traditionally drought-hit. Those geographies are paying 100%. There are not much changes in some geographies—we have Vidarbha region in Maharashtra. There are some issues in western Uttar Pradesh, drought-affected northern Karnataka. There is no rational explanation for this.
Being a bank, the market determines the interest rate. As a microfinance institution, it was capped at 10%. Your process is not equipped to handle this. If you are going for six-hour meeting, and if there is some issue, everything goes for a toss. Typical quality of your assets also hurt ability to lend. All in this context, could you throw some light?
Ghosh: This year you will see a lot of credit provisioning from microfinance institutions since RBI’s temporary respite has gone now. As far as GST is concerned, a lot will depend how the government executes it.
Will you like to continue what you do or challenge universal banks?
Ghosh: We may seek a universal bank licence for different reasons. As a small finance bank, we have a fairly tough capital requirement, which a universal bank doesn’t have. From that perspective, we would like to become a universal bank.
Vasudevan: In terms of universal bank aspiration, from day one, we have set up our bank from that perspective. Even though Basel III is not applicable to us, we voluntarily strive to comply with it. My business model may not change if given a universal licence.