As you have started your banking operations only last month, in the initial phase, what are the products that you plan to offer to retail consumers?
We are a non-banking finance company (NBFC) that is converting into a bank. Our first objective is to offer our basic banking products—namely savings account, current account, fixed deposits, overdraft products and some of the lending products such as loan against property, gold, and overdraft against fixed deposits—to our existing microfinance customers.
Is there a differentiated offering for your retail customers such as higher interest rate on deposits?
First, there are three phases of differentiators that we want to create. One, we want to offer all these products through digital solutions. Two, we want to offer almost all our products through doorstep service. Three, deposit rates will be a key differentiator for the platform.
To begin with, we are offering 7% for deposits on savings accounts, if the balance is more than Rs1 lakh; and 6% if the balance is less than Rs1 lakh. We believe this is a very competitive offering compared to other products in the market. Rates on fixed deposits vary between 8% and 9% per annum, depending on the tenure ranging from 1 to 2 years. If someone puts money in a 2-year fixed deposit, she will get 9% returns. Another differentiator is that these fixed deposits are monthly compounding. Normally banks do quarterly compounding.
Also, for senior citizens, we are offering 50 basis points more than what we are offering other customers. (One basis point is one-hundredth of a percentage point.)
Since all banks are going digital when it comes to retail products, do you have digital strategy for retail customers?
Today, our retail customers and the microfinance segment that I want to address are primarily unbanked, or with not enough digital solutions. Our first aim is to provide doorstep banking to them.
An employee of the bank will use digital technology with a tablet, which is Aadhaar enabled, to help open accounts at the doorstep. This was the first product that we launched.
Over the next few months, we would want to add more to this digital platform by enabling internet-based or mobile banking-based account activation where customers can activate and complete the process themselves.
We have an employee app right now. We just got the mobile banking licence from Reserve Bank of India (RBI) recently, since it is an additional licence that we needed to take.
We will be launching our mobile banking app within 3-4 weeks. The online account opening process will take place in 6 months because it will need more work.
Who are your target customers? Are you looking to expand in new cities?
Today we are a rural-based microfinance institution. We want to become a semi-urban and rural-based bank. Rather than having just another bank in the same area, our bank should work in areas where there is more potential. Today when we do microfinance loans, we target the base-of-the-pyramid customers. These are customers that earn about Rs1-1.5 lakh per family per annum. They are primarily in micro businesses and typically take microfinance loans. But as part of the banking transition, we want to expand this to retail mass and micro and small enterprises.
When it comes to the income group, I would say income is not easily understood. When we are talking of digital banking, for us the young, new-salaried customers are also very important. I would say initially we would be targeting income groups of up to Rs5 lakh per annum and over time if we could take it to Rs10 lakh per annum.
Today we are in seven states and one union territory, which covers the western and southern geographies. Being a microfinance company, we have 230 offices and we are deeply penetrated in these states. The intent is that as a bank we should clearly offer more products than what we used to.
There is huge potential in the existing states. We would first focus on offering our banking products in states that we currently have presence in. We want to take all these products to our customers. For example, if we were present in the outskirts of Surat but not in the city, now we will start doing business in the city.
As part of the banking transition, we would be covering markets that we were not covering in the past. In the first 2 years, our focus would be to increase banking with depth in the seven states covering the semi-urban markets. After that we will expand in other states.
How many ATMs do you plan to roll out? Will you offer debit and credit cards to your customers?
We want to use recyclers instead of ATMs. The difference between ATMs and recyclers is that while ATMs only dispense cash, recyclers also accept cash. There are a few pilots being done by banks. But as a strategy, we have adopted recyclers as the only option rather than putting up ATMs. Initially we will put it up in all our branches. We are going to start with covering 50 bank branches by the end of the financial year.
We hope to provide 24x7 cash deposits and withdrawals. The charges will be in line with what other banks are charging and the RBI has rolled out as a policy. We don’t need to tie-up with any bank for providing recyclers. We will be buying these machines and connecting with National Payments Corporation of India (NPCI) directly. This will be our own infrastructure. Initially, we will be launching with Rupay debit cards and these will be directly issued by our bank. We are not providing credit cards on day one. In my experience, you need a large scale to be successful in the credit card business. We would be looking for partnerships for the credit card option with some other banks. Within 12-24 months, we will offer credit card.
Now that you will be able to raise deposits, will that translate into a reduction in interest rate for your borrowers?
As a microfinance company, our lending rates currently start at 22% per annum for our customers. As a bank, we want to bring the rates to below 20% once we stabilise our deposits. Initially, given the transition, we are still carrying our old balance sheet. Hence, it will take some time for the newer deposits and the retail franchise to work on deposit. It would take a couple of years to reach that point.
We want to try and turn our wholesale borrowing as an NBFC to a mass retail deposit strategy. As part of the transition, once we reduce our cost of funds, we will clearly pass it on to our customers. Initially, the cost of funds don’t come down significantly because there is a large proportion we are carrying on our balance sheet. Also, it is not very easy for us to kick-start our retail franchise—it takes time. Branches and products have to be rolled out and technology needs to be stabilised. In the banking world, on the deposits that we raise, we have to invest a good proportion in statutory liquidity ratio and the cash reserve ratio. This introduces a little drag on our cost of funds. Due to all these variables, there would be slow decline in cost of funds in the first year.