Hyderabad: Ujjivan Financial Services Pvt. Ltd will go slow on microfinance as it prepares to transform into a small finance bank, a top executive said. In the next three years, Ujjivan—one of India’s 10 small finance bank licencees—will look to grow its loan book at 25%, as against around 99% in the last fiscal year.

“So far, we were just giving loans, but now, we also have to take deposits. The entire gamut of business is going to change and we have to be ready in the next 15 months with everything in place. To bring about a better integration, we will prune growth to around 25-30% in the microfinance business and will not acquire any new customers for the next three years," said Samit Ghosh, managing director of Ujjivan.

Lower targets will help the company install the required technology and processes to become a small finance bank and serve unbanked customers. Ujjivan has hired professional services firm EY to bring changes across technology, people, physical offices and other aspects of the business.

From March 2014 to March 2015 Ujjivan added a million customers, doubling its loan book. In September, its loan book stood at 4,000 crore, with 2.5 million customers. The company hopes it will be able to launch the bank in the first quarter of fiscal 2017.

“At the end of the day, microfinance is unsecured lending and small finance banks have to taper off growth here. Or, they would look at graduating the customer to offer existing bank products. With eight microfinance institutions (MFIs) converting into banks, around 50% of the industry’s business will go away with them over a few years. Nevertheless, younger and newer microfinance companies will cater to this gap, given that they are fast-growing," said Ratna Vishwanathan, chief executive officer of Microfinance Institutions Network (MFIN), an industry body.

The aggregate gross loan portfolio of MFIs stood at 36,660 crore during July-September. To be sure, Bandhan Bank’s exit from microfinance in August hurt the gross loan portfolio by a fourth.

According to India Ratings, the total managed loan assets of all 10 prospective small finance banks is 20,100 crore in fiscal 2015.

MFIN is, however, hopeful that the dip in the business coming due to MFIs becoming small finance banks would turn favourable for smaller MFIs, even as there may be a slight slowing down.

“Banks have to meet their priority sector lending norms, which means more debt will be available for smaller companies as well. Also, most companies so far only entered such areas which were seemingly successful with growing business opportunity. Also, it is now to see how MFIs would tie up with payments banks to offer a full fleet of products," Vishwanathan said.

The pruning may not be much for mid-sized NBFC (non-banking financial company) MFIs that received licences. Utkarsh Microfinance Pvt. Ltd, for instance, expects loan book growth to dip by about 25 percentage points till the time it becomes a bank.

“The growth will be lower than normal because our resources will be diverted towards setting up and functioning of the bank. However, the dip won’t be large. From around 80-100% growth that we tap, it would remain at 70-75%. Once we turn into a bank, over five years from then, the microfinance business would remain at 30-35% of the total business. In absolute value, it will still be large as there would be other asset classes," said Govind Singh, managing director and chief executive officer of Utkarsh Microfinance. The company’s loan portfolio now stands at 1,100 crore.