How do you see this opportunity to operate a small financing bank?
We have an existing clientele but as an MFI (microfinance institution), we could only grant loans. As a bank, we can offer all products. An NBFC (non-bank financial corporation) requires a license for each fundraising activity. We can now cater to all types of customer segments. So in terms of opportunities, it’s huge in the central geography of Uttar Pradesh, Bihar, and eastern India in which we operate. It’s a win-win for all – our customers need it, we need more customers, and we can offer more products to our customers. We are also looking at MSMEs (micro, small and medium enterprises) with an average ticket size of 1 lakh right now. Our MSME loan book is just 80 crore. We are looking at a higher range of tickets, which we have not done so far. In housing as well, we have launched a pilot project and are also considering financing commercial vehicles in a year, as well as a two-wheeler and personal loan program. In percentage terms, the microfinance portfolio will be reduced to 50% in the next four years. We are going to create more MSMEs and in the personal segment, but not large companies because we don’t have the money or the capacity for it.
What kind of businesses will you lend to?
Our sweet spot in terms of individuals is between 6,000 and 1 crore, and although we do wholesale loans, it will be between 5 and 10 crore, where we will do very small transactions of five to 10 transactions for a portfolio. 100 crore; 95% of our portfolio will be less than 5 lakh. But the bottom line is that we can now increase liabilities as well. Our current cost of funds is over 12% because we have to take out loans from banks. It was in the range of 13.5% to 14% a year ago. We expect it to drop to 9-9.5% over the next year depending on how quickly we can collect deposits. It will also be generalized as we will have a few lakh depositors. I will focus on the lower and middle segment, but it will be broad with many products.
What areas are you going to focus on?
At least in the near future, we intend to limit ourselves to our basic geography like UP, Bihar, Jharkhand, Chhattisgarh, Madhya Pradesh, parts of Haryana and Uttarakhand. We also contemplate Odisha. More than 65% of branches are in the UP and Bihar, and this will be the case for the next few years. We will not compete with the big banks. There might be a challenge from the NBFC, but we have advantages over them. We are the only licensed bank in this geographic area and the only non-RRB (regional rural bank) non-cooperative with headquarters in this region. So we face limited competition.
What small industries are you targeting?
What we have done is provide loans, not for consumption but for income generation. As long as there is an activity that is sustainable and scalable, and that requires funding, we are ready to support it. In the villages, you have clusters like livestock in Mirzapur; in Varanasi there is a loom business. There are clusters where even from a credit point of view, we have better expertise. Our preference is for these companies. But that doesn’t mean we won’t fund outside the cluster. This exercise we are targeting over 300 crore MSME. MSMEs, along with housing and CVs (utility vehicles), will be in the order of 3,000 crore in five years. Our book size will be around 10,000 crore in five years, compared to 1,800 crore now; 35% of our book will come from MSMEs and 12-15% from personal and other loans; 50% of the loans will come from non-microfinance.
How do you judge the credit profile of first-time borrowers?
We create a rough financial statement by asking them about their income, expenses, and activities, which established banks don’t. This is where our expertise takes on its full meaning. Getting foolproof accounting books is difficult. We do it ourselves. Our sales team and our credit team meet people and see their activity, and do their assessment on that basis. Therefore, this is not a balance sheet assessment. Our people look at the cash flow and try to match what the borrower says. Our employees are specially trained for this.
Your plan in terms of branches and people?
Our new branches will not be in microfinance. The new branches, especially in cities, will focus on personal loans and liabilities. Our microfinance branches will also deal with liabilities as well as third party products like insurance and mutual funds. We have about 3,900 employees now, up from 2,300 when we got the license. We expect to be close to 4,700 by March 2018 and, as the size of the book increases, to around 9,000 in five years. We focus a lot on getting local employees and newcomers because their adhesion is higher and new ones can be easily modeled. In the new geographies we are looking at a business correspondent model as we will not have to set up new branches and this will help us to expand more quickly in new places like Odisha.