Kolkata: Demonetisation has dealt a body blow to Ujjivan Small Finance Bank, which has had to tweak its expansion plan because of asset quality deterioration, according to Samit Ghosh, managing director and chief executive officer.
Ujjivan, which previously made tiny loans to underprivileged people and has a loan book of around Rs6,600 crore, turned itself into a small finance bank in February. Its gross non-performing assets (NPA) were at 0.28% of outstanding loans until early November.
But following the scrapping of high-value currency notes in November, Ujjivan’s gross NPA jumped to 3.7%. These are loans that are due for more than 90 days, and Ghosh said much of it—up to Rs180 crore—may have to be written off.
This unanticipated loss has forced Ujjivan to slow down the pace of transformation, Ghosh said in an interview.
What are the key challenges that you are dealing with as you convert Ujjivan into a bank?
Three things... We have given ourselves three years to convert all our microfinance branches into bank branches. We would have gone faster had we not had to deal with demonetisation.
The second key challenge is to overcome the impact of demonetisation. It affected us in two ways: it impaired asset quality and we were also not able to disburse loans for a few months.
The third challenge is to expand our revenue streams. As a bank, we are looking to introduce some customized products such as insurance, loans for affordable homes and so on.
Microfinance currently accounts for around 85% of our business, which in five years will come down to 50%. The balance will come from MSME (micro, small and medium enterprises) and other products such as loans for affordable homes.
Have your borrowers started to save with your bank?
We have realized that our borrowers will not be able to provide us all the deposits we need. And retail banking takes time to be built ground up. Each branch could take 5-6 months to convert customers into depositors.
So initially, we will be dependent on wholesale deposits, which are slightly more expensive than retail deposits. However, from our research, we have figured out that a lot of savings go into shadowy finance companies such as you had Saradha and Rose Valley in West Bengal. There are similar ones in the south, too. We are trying to get these deposits.
Internally, the target is to have at least 60% of our total assets to be funded by deposits in three years.
What is your cost of deposit?
It is 10.6% at present and as we retire bank loans, we expect this to go down by around 75 basis points in the current year. (One basis point is equal to one-hundredth of a percentage point.) We will repay all bank loans taken previously for our microfinance business within two years.
But with Rs1,600 crore parked in regulatory deposits such as CRR and SLR, our return on equity will remain more or less unchanged, despite the reduction in cost of borrowing, at around 18%.
Compared with Bandhan Bank, Ujjivan appears to be quite conservative...
Oh yes, and that’s a conscious choice: we decided not to take the big bang approach like Bandhan. It worked well for them, but we have decided to stretch out our investments so that our operating costs didn’t jump sharply.
We would have gone a little faster had we not been impacted by demonetisation.
Would you look to turn Ujjivan into a universal bank?
We may or may not. Even if we apply for the licence, we will do so for the advantages of being a universal bank such as lower capital adequacy requirements. But we will remain focused on our customer base: people who do not have adequate access to banking services. So we are not targeting the middle-class or the affluent.