Suryoday Microfinance Pvt. Ltd plans to offer higher term-deposit rates to attract customers once it starts small finance bank operations.
Despite this, the Mumbai-based microfinancier will see a 200 basis point drop in its funding costs, as it moves away from a funding mix dominated by bank borrowing, said a top executive.
The cost of funds for most microfinance companies varies between 10% and 12%. “Because of pricing benefits, raising term deposits will not be a challenge for us. We will offer 100-150 basis points more on deposits than what commercial banks are offering as we believe that competition is not intense in this segment,” said R. Baskar Babu, chief executive of Suryoday.
Raising term deposits will be crucial for microfinance-turned-small finance banks in order to cut overall costs. In order to increase the deposit base, small finance banks will offer more attractive rates on the deposit side.
Suryoday plans to focus on smaller term deposits of between Rs50,000 and Rs1 lakh and will offer depositors close to 9% interest rate for a one-year term deposit. By comparison, Equitas Small Finance Bank is offering 8.5% on one-year term deposits.
Abizer Diwanji, partner and national leader, financial services and restructuring services at EY India, said: “It is reasonable enough for these microfinance-turned-small finance banks to offer higher interest rates on deposits during the initial years.”
Suryoday currently borrows 55% from banks, 13.8% from non-banking financial companies and raises the rest through non-convertible debentures, subordinate debt and securitization, according their annual report 2015-16.
“We will hire 500 employees from non-financial background like hotels, restaurants once we convert all our bank branches,” said Babu.
In the microfinance business when a customer borrows money, it is not easy to ascertain if the amount borrowed by the customer is for income generation or for private consumption.
“Once the microfinance customer starts depositing money with us, lot of analytics can be inferred out looking at what quantum and at what frequency is the person saving. We plan to divert our 20-25% portfolio in non-microfinance business, one year from now,” said Babu. The benefits from lower funding costs will be passed on to microfinance customers, he added.
When asked about growing bank branches in the future, he said Suryoday won’t grow bank branches by a large quantum given the increasing role of technology.
The gross loan portfolio of Suryoday Microfinance stood at Rs1,046 crore as of 30 June, a 64% increase from the year-ago period.
It plans to start banking operations before December, having got the final nod from the central bank in September.