Mumbai: At the Mint’s South India Banking Conclave, India’s top small finance banks got together to discuss the key challenges they face during the transformation from a microfinance company to a bank. Rajeev Yadav, CEO of Fincare Small Finance Bank; Ajay Kanwal, CEO of Jana Small Finance Bank; Baskar Babu Ramachandran, co-founder and CEO, Suryoday Small Finance Bank; Samit Ghosh, MD and CEO of Ujjivan Small Finance Bank; and Vikram Akula, chairperson and co-promoter of Vaya Finserv Pvt. Ltd, and founder of erstwhile SKS Microfinance; took part in the discussions moderated by Mint’s consulting editor Tamal Bandopadhyay.
In private, most small finance banks (SFBs) regret becoming a bank because of compliance. Do you regret becoming a bank and what are the challenges you see?
Rajeev: If you look at the previous financial year, there have been two challenges for SFBs—managing demonetisation and the huge impact on our portfolio. We had to take some write-off, clean the books and we have done that.
There are three to four key variables at play—business model, technology, HR and raising liabilities.
Let’s look at technology first. We have seen a phenomenal change. All SFBs have adopted the best technology. The challenge is that everything is a fight every single day. If you design a bank on a digital framework, you have to make it work every single day. In some institutions, there is the old MFI business and the new bank business, that will be a process one has to go through.
Baskar: The biggest challenge is listing out what the challenges are. When we got in-principal approval, we celebrated for a couple of months. Then it struck us that technology, liability and people are usual challenges.
The ability to be agile, take things as you do are the challenges. Being an NBFC MFI is like being on a smooth road leading to a dead end. Becoming a small finance bank is like riding on a bumpy road, which leads to a highway. Liabilities, we seem to have done a good job. People question what are you. But the regulator insists that you have to mention small finance bank. The word small finance doesn’t really go well with south India. They think we are some company. Then we have to show the licence. Then they go check in the website. The next challenge is physical versus digital.
People say the future is in technology. All said and done, there is a behavioural aspect to lending. Physical presence is required. Banking is a long-haul business.
Ajay, your organisation was the last one to take off, just three months ago. Professionally, you are new to this. You have been a foreign banker and now you are into small finance. The way you look at things will be different. What is your take?
Ajay: I would always think that being a small finance bank serves the purpose of financial inclusion more than an MFI. Our customers look forward to engaging with them, participating with them, helping them understand more about finance, helping them save. Being an SFB is like a person with feet in two different boats.
One boat is about continuing your asset side business, financial inclusion business and get digitally very savvy. The other boat is the liability boat. We well know that the asset boat will not serve the liability side of the business. You have to compete with big banks, your rates have to be the best, relationship managers have to be as competitive as a high street bank. So you are running two different organisations. Therefore, the challenge is how we keep it culturally alive and perfect so that we keep growing and also make sure compliance is at its best. All the MFIs had a tough time post demonisation. We carry the NPA challenges. So how do you manage risks and bring about diversification in your book? Finally, I do think that your regulation is like a universal bank. We need more help during the transition phase.
Vikram Akula, as an outsider what are the challenges you see?
Akula: What concerns me the most is the underwriting in financial inclusion. There was, in the early part of the first decade, a robust group lending and group appraisal system that went on.
In the crisis of 2008-10, there was some problem with how that was implemented. But if you go back to the first decade, it worked. There was a logic to it. There was an appraisal system, which allowed you to give out billions of dollars of loans and get 98-99% repayment rates.
Today, if you look at the sector, you still have group lending largely, but it is no longer functioning for the purpose of underwriting. It is a channel to deliver finance. The question is what has replaced underwriting. What has replaced the underwriting is credit bureau. The credit bureau gives some level of framework as opposed to a wild west atmosphere.
Let’s think about what a credit bureau is. It’s simply a reporting of the subset of the overall financial inclusion space. It’s a reporting by the MFIs, SFBs, SHG-bank linkages. This kind of stress will trigger political interventions that we saw after demonetisation and during the 2010 crisis. When there is distress that’s when you have a foothold for political intervention and that has created the biggest catastrophes in the world.
Two school of thoughts. One school of thought is that human connectivity is very critical, while many others say technology is the enabler. What are the other challenges?
Samit: Our mandate is to serve the unserved and under-served. This segment is largely doing financial services with the unorganised sector. How do we wean them out from chit funds and moneylenders, and bring them into the banking sector? That’s a huge challenge for us.
On the liability side, they have enough money, but they keep it outside the banking system. How do we bring it back? In microfinance, everything was person to person. But if we have to serve the segment in a viable manner we really have to move them to self-service. The path from person to person to self-service is introducing digital technology. If we don’t follow this, we will not be able to bring down the cost of funds.
Being an SBF, how do you insulate yourself from politicisation? For how long do you think SFBs can continue charging high lending rates? Do you think there could be a political backlash against this in future?
Akula: If there is an underwriting challenge, the solution is technology. I don’t mean tactical technology. I mean transformative technology.
The fundamental area that we have to develop is credit scoring. The data exists, but two to three years of data is not enough for robust credit scoring. If we can’t develop traditional credit scoring because of lack of data, we have to experiment with alternate credit scoring.
We have to allow for experimentation in a randomised way so that we can truly see that credit scoring works. Otherwise we are going to have crisis after crisis.
Bhaskar: The business of financial inclusion is about creating credit worthiness. We have been doing transactions with customers. Most of us are focused on the credit side of it. It’s far more expensive to mobilise savings from customers. It’s an easy temptation to keep these as two separate verticals—deposits from one and lending to another. But if you want to have truly solid risk management in future and want relationship as core, a sustainable one would be that customers start saving meaningfully. When you forge a relationship, people are too busy growing in their life to think of waiver, default.
Ajay: If you are relevant in the community and engaging the customer, and he thinks that you are a key part of his future and his life, there is less likelihood of him using a political moment to walk away from you. As SFBs get more and more into a community-based lending approach, they will be a lot safer and lot better. Being an SFB, the biggest cost is collection.