BackDelinquencies likely to rise once the moratorium on loans gets over: Nitin Chugh
No one knows by what proportion the delinquencies will rise, so it’s best to stay in touch with customers
PremiumBanks’ lending activities have stopped since the lockdown started. In addition, the moratorium on loans will make it difficult for banks to assess delinquencies. Nitin Chugh, MD and CEO, Ujjivan Small Finance Bank, discusses the impact of the covid-19 pandemic and the measures banks are taking to resume lending activities
How do small finance banks manage to give higher interest rates on fixed deposits (FDs) compared to universal banks? Some offer higher rates for specific maturities? How?
It has little to do with being a small finance bank. We are new banks and do not have a high proportion of Casa (current account and savings account) base, unlike universal banks. Casa is a source of low-cost funding, and it takes time to build it. New banks, therefore, offer a higher rate of FDs.
Over time when the cost of funds starts to change, and as the proportion of Casa rises, FD rates can go down. We are only three years old, and our Casa levels are around 13-14%.
We also don’t believe in getting savings accounts (our rate is 4%) at higher interest rates, which many banks have done in the past.
Banks’ rates are dependent on assets and liabilities management (ALM). They have to match their assets with liabilities. If a bank has long term assets, then the bank will want long-term liabilities and vice-versa. Say, a bank sees a surge in short-term assets, it may offer higher rates on FDs for the short term. If a bank is giving higher rates for specific FD tenures, it means it has higher assets for those tenures.
Most lenders are unable to disburse loans due to the lockdown. What are the steps you are taking?
It’s a temporary pause. Anything that was dependent on field operations, where representatives had to meet customers, can’t be done right now. Most banks, including us, have paused loan disbursal. We are re-working our processes of underwriting. There will be parts of the business that we would be able to keep operational during the lockdown. A lot of our loans, for example, are to existing borrowers whose paperwork is already done. We are trying to rework processes where we would be able to reach out to them on the phone and offer loans without any face-to-face interactions. That’s how business can be restored partially as the lockdown continues. Also, Aadhaar-based KYC (know your customer) allows loans up to ₹60,000, which is 1.8 times the average ticket size of our micro-finance loans, which is ₹35,000-38,000. We are fast-tracking our digital initiatives.
Are you tightening your credit policies?
We are conservative as lenders. We keep evaluating our credit policies every month and make changes wherever and whenever necessary. We are currently in touch with our customers to find out about their well-being and explaining the various aspects of covid-19. We are also trying to understand the economic distress they are going through. On the basis of the feedback, we have started creating a database which will go into our modelling of credit policy. We would rather take a call based on the data from our customers than on the perception on the economy. No one knows the impact of covid-19 on the economy. We want to be prepared for different scenarios.
It is believed that delinquencies could go up once the moratorium on loans ends. How are you preparing for that?
We offered moratorium to 99% of our customer base. Our entire micro-finance base has been given moratorium. We are calling other customers and asking them if they need a moratorium, after explaining the policy. For two months, banks can’t judge whether the customer is delinquent. We are expecting delinquencies to rise once the moratorium is over. But we, or any other lender, would not know, by what proportion they will go up. It’s best to stay in touch with customers so that we have some idea of what is likely to happen. Rather than contemplating about it now, the bank should be able to make decisions when delinquencies show up.
Will you be going slow on lending during the moratorium period?
We have a large customer base of 5.1 million. In the worst-case scenario, we would slow down on acquiring new customers. But we would still have enough and more to do with our existing customers. That is where the whole comfort lies. In our micro-finance business, which is three-fourth of our book, about 70% of our business every month is through existing customers.
How will the lockdown and the pandemic affect the bank and its customers?
We are using this time to stay connected with our customers, look at the well-being of our employees, to revisit our processes and policies. We are using this time to be prepared for all possible scenarios. We are connecting within the industry at various levels.
Are small finance banks riskier than universal banks as they cater to the unserved and underserved population?
A small finance bank doesn’t mean it’s a small-sized bank. It’s just that we deal with small borrowers. Many mid-sized banks have the kind of customer base we do. The financial strength of the bank is readily available. Our gross non-performing assets for the December 2019 quarter was 0.9. How many universal banks report that sort of a number? At a scale of 5 million-plus customers, we are running that level of efficiency and quality. For new banks, there are different nuances. Our costs are higher. We deal with a lot of senior citizens, who comprise over 40% of our retail book. They are worried about their lifetime savings and they believe in us. Our capital adequacy is 28.3%. Liquidity coverage ratio is always far in excess of what is required. In fact, the financial health of other small finance banks is also good. Just because we deal with small borrowers doesn’t mean we are taking higher risks.
Any well-run bank, which is well-funded and a well-managed credit portfolio, can weather any storm, no matter which segment of customers they deal with.
Tinesh Bhasin
tinesh.b@livemint.com
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