With a business model centred on certain geographies, Fintech Small Finance Bank has been largely unaffected by the pandemic. In an interview with Mithun Dasgupta, MD & CEO Rajeev Yadav says the bank looks to grow its loan book by an average 35-40% over the next three-four years. Excerpts:
Do you feel the need to tweak your business model in any way or is the model robust?
I would say that, fundamentally, our model is centred around underbanked and unbanked customers, the rural geographies as we call it, and semi-urban markets. So, the geographies that we operate in are all-important. And environmental changes don’t really impact our core functioning. The kind of portfolio that we offer as a bank has over time evolved to cover more products — be it in lending, saving or protection. But, that is an aggregate of our efforts as an organisation. We will keep learning as we go forward, but the fundamental framework of how we operate has not changed because of the pandemic.
What percentage of your branches are in unbanked regions?
While banking regulations require us to have 25% of our branches in unbanked rural centres, we have 30% of the branches there. We provide doorstep services; customers don’t have to come to our branches. In our microfinance business, 95% of the customers are from rural areas. In the other secured businesses, we could have a reasonable ratio of 60:40 (semi-urban: rural). So, we have a very rural focus in a couple of segments.
Digitalisation is catching on. Since you operate in a specific geography, are you able to offer the digital option in borrowing or lending?
Actually, we are a very, very digital bank and are leveraging digital thoroughly. But, there is a difference in how we operate. Digital technology can be leveraged in two ways —either customers use smartphones and employ the digital route or there is an employee-led model. In the latter case, an employee sits with a rural customer and does the transactions digitally, without any paperwork. Our employees are helping customers with the company-provided tablet app. Thus, we have opened nearly 100% of our savings accounts and disbursed 100% of loans through the digital route.
Your loans are primarily unsecured. Is that a worry?
Since the bank started out as a microfinance business, 80% of its portfolio continues to be unsecured, in a microfinance format. It has been a gradual transformation to secured lending.
By when do you expect a fair balance between secured and unsecured loans?
We are trying to increase the share of secured lending by 6-7% every year. Our unsecured portfolio too enjoys a good growth rate. Unsecured lending happens to be our core segment, through which we further financial inclusion. We therefore need to grow faster to build up our secured portfolio.
If we grow secured lending by 6-7% every year for another three-four years, we could strike the right balance between secured and unsecured loans.
Do you co-lend with fintech companies? Or is your book totally proprietary?
Yes, our book is proprietary. Small finance banks cannot do co-lending. Being a ground-level company, we specialise in small-ticket loans in villages. So, we don’t need a third party for last-mile purposes.
Which products are you focused on in the secured loan segment?
There are three products we are focussing on right now — gold loan, micro loan against property (LAP) and affordable housing loan. Both micro LAP SME loans and affordable housing loans are very large markets. What’s more, there are not enough players in these markets.
Since the bank has a largely unsecured portfolio, how do you assign risk weight to assess capital adequacy ? How much do you provide against loans?
The regulator has various rules for different products. Right now, our capital adequacy is of the order of 27-28% (of which nearly 95% is tier-I), although the minimum requirement is only 15%. Capital adequacy is therefore not a problem. From a provisioning perspective, we do a higher level of provisioning for unsecured loans. As a bank, we provide accelerated provisioning. So I would say risk weight is not a vital variable for us. It is the provisioning policy and the commensurate capital available with the bank that are the important metrics.
Given the capital you have, at what pace do you expect the loan book to grow in the next three-four years?
Various scenarios are possible. We can theoretically run the bank for one or two years and bring capital adequacy down to a level close to the regulatory requirement. But given that we have to meet regulatory conditions on the listing, which is scheduled for September — and provides us an opportunity to raise capital — we plan to raise capital in this fiscal, which will suffice for the next two-three years. Loan growth has slowed this year because of the pandemic. Assuming some ups and downs in business, we can hope to grow our loan book by an average 35-40% over the next three-four years.
Do you see any risks to business in the post-Covid era?
Covid-19 has obviously led to a certain degree of risk in the consumer portfolio of all banks. With consumers of all kinds getting impacted, continuance of cash flows is less certain than before. But we anticipated that. And given the bank’s good performance in the past, we made additional provisions. In any case, we have sufficient profitability to manage the incremental credit issues arising out of Covid-19. As the business is back to near-normal levels, both in terms of disbursement and collection efficiency, there is no incremental risk, unless the situation changes materially on the Covid-19 front.
What is your collection efficiency in the microfinance segment? Is there any risk in geographical terms?
If we look at the overall collection efficiency, including the pre-Covid portfolio, it is just under 95%. We are among the leading banks on that metric. The figure for non-delinquent zero bucket collection efficiency is 99.5%. That’s a key benchmark for normalcy. We don’t have exposure to the North-East, particularly Assam. So, there is no such geographical risk.
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