And from the AP microfinance crisis?
The key takeaway is we must be substantially capitalised at all points of time. We decided never to be leveraged beyond four times the book. Barring Bharat Financial — the erstwhile SKS Microfinance — which had a net worth of over Rs 1,000 crore, for the rest of us, it was less than the loans lent in (undivided) AP, which is why the system virtually collapsed.
The other learning is to not diversify too much. In FY09, a few non-banking financial companies collapsed because they went aggressive on unsecured lending, which wasn’t their expertise; some had to get foreign partners. Your capital adequacy should be substantial to weather these situations.
And, when the going is too good to be true, it also calls on us to find out what is causing all this success! Because when the market offers tailwinds, and we don’t understand the reasons behind it, we may be caught on the wrong foot. So, when we converted into an SFB, we decided to grow at a pace comfortable to us, and not chase growth for the sake of it.
What is your definition of “comfortable pace”?
Our market share is about 1.5 per cent among MFIs. Though small, managing risk is extremely important. During the AP crisis, the perception was one couldn’t expect MFI players to talk about return on investments given that they had started out as non-government organisations. Then the narrative changed. People understood that a social business doesn’t have to be economically unviable. Processes such as keeping a credit score for customers and so on got fast forwarded because of the crisis.
Our focus is on the diversification of the portfolio by scaling up retail lending, comprehensive and meaningful financial inclusion for customers. We are also expanding the branch network keeping the customer experience. The small and medium enterprise (SME) portfolio is crucial. Currently, microfinance contributes almost 90 per cent of it. From a risk-management perspective, growing the retail portfolio is important in the long run.
Your assets haven’t passed the test of time. Isn’t that a risk?
Yes and no. Irrespective of who is running the portfolio — and you could put the best of talent in place — they can’t replicate past successes. Therefore, how swiftly someone can switch the business plan is equally important when things aren’t working out.
When we started unsecured lending, we realised it wasn’t the time to accelerate growth because not all risks can be priced in. Another risk is our inability to monitor the end-use of credit. So, given the market conditions, we decided to be only in secured portfolios. However, experience tells us that a person who has taken a secured loan will also repay the unsecured. There isn’t much by way of dichotomy in the repayment pattern. But, in times of stress, there will be a tendency to differentiate between secured and unsecured products, because the repayment priority for the borrower tends to change. To that extent, you are right — growth can only happen gradually at this point in time.
But then, even in the commercial vehicles’ segment, we are looking at providing working capital to small, but established fleet operators. In affordable housing, the fact that some housing finance
companies vacated the space a bit has helped us, though we are very cautious here too. Our non-performing assets ratio is about one per cent.
Apart from loan products, how would you want to diversify?
Our endeavour has always been to service the needs of customers in a holistic manner, and we are actively working on adding third-party products.
Currently, we distribute life, general and health insurance products; and social security schemes such as the Pradhan Mantri Jeevan Jyoti Bima Yojana and the Pradhan Mantri Suraksha Bima Yojana. We will soon be launching a mutual funds platform and work for offering the Atal Pension Yojana is also underway. These products are important for building a relationship with customers. It may be easy to mobilise deposits at an interest cost of 8–9 per cent, whereas insurance comes at 11 per cent. But this also allows us to understand customers’ cash flows and that money can come into the bank.
How has your experience on the deposits front been?
The share of current and savings account deposits is just 10 per cent of our total deposits. The challenge is not whether our customers have enough money to save. It is about bringing them into the bank as savers. It isn’t about the interest cost alone, it’s also whether or not banks can provide custodial service for depositors. Often, some microfinance clients aren’t welcomed by banks because of their profile and size of the deposits. We started offering recurring deposits and a product called the “pick-me box” similar to a piggy-bank where customers could store savings and our field agents would deposit it in the bank on their behalf.
When will the bank list?
We commenced operations in FY17, our net worth touched Rs 500 crore in FY18 and we have to list the business by FY21. Listing isn’t our immediate priority. From the time of being an MFI till date, barring our first investor which was Aavishkar Capital, which exited a few years ago as the fund’s life was maturing, all other private equity investors are still with us. Aavishkar was a sequential investor from 2009 to 2012.