Our borrowing cost could fall by 2% in FY18: Ujjivan Financial
Ujjivan Financial Services shares rallied 10% to close at Rs358 on Wednesday after a subsidiary received scheduled bank status from the Reserve Bank of India. The non-banking finance company informed exchanges on Tuesday that Ujjivan Small Finance Bank, the wholly owned subsidiary, has been included in the second schedule of the Reserve Bank of India Act, 1934. Sudha Suresh, managing director and chief executive officer of Ujjivan Financial Services, spoke about the development in an interview. Edited excerpts: Can you tell us what are the new conditions and what are the old constraints that won’t apply? Definitely, that is good news for Ujjivan Small Finance Bank with the scheduled bank status coming on. And what this really translates to is the ease of the funding facility in terms of increase in deposit sourcing and that opens the door for issuance of certificate of deposits (CD) and you have the insurance firms, the mutual funds, banks, as also the cooperative banks which can now come forward across funding and deposit immobilisation. You can do CD, that is one. What is the other? Is there anything in terms of your asset book also? Were there not geographical restrictions in the small finance? Any of those go away?
No, in terms of our business, the small finance bank (SFB) conditions stand good. So the SFB guidelines which were promulgated by RBI earlier, they have specified in terms of the asset portfolio which is typically that 50% of your business has to be below Rs25 lakh and 50% of your business can be above that per customer. So not much changes there on the business, but what this transitions as a scheduled commer- cial bank typically is on the liability business and it forays great openings in terms of various sources of funding and that is definitely going to have a good impact in terms of the cost of borrowings.
So you remain a small finance bank but you are a scheduled commercial bank?
So, how does the cost of money come down because of the change on the liabilities side?
So, to explain it in simple terms, with the facility of being able to mobilise deposits through banks and insurance companies as well as through mutual funds, what is going to happen is increasingly we could see a spate of increase in fixed deposits as well as CDS and typically these could come at varied costs. One can look at progressively reducing the cost to almost about 6.25 to 6.5%, anything sub-7%.
And as you know, as an Nbfc-microfinance institution (MFI), to a large extent, our borrowings were with almost an average cost of funding at about 10-10.5%. So you would see that as the NBFC MFI grandfathered loans that we have on our books, as these get eased off with their regular payment as well as some amount of pre-payment and these get increasingly replaced with deposits where the cost could be sub-7%. How long will the transition take? By when can we expect this to start showing up? To add to that, this year itself, how much of the old debentures are getting redeemed? So this year, what will be the reduction in cost of funds?
I will put it in this way. Once you look at the new cost of borrowings which could be at 7%, one should not forget to add technically the statutory liquidity ratio (SLR) cost which could be anywhere between 1-1.2%. So technically all we could look at is, with efficient borrowing, our borrowing could come down by 2% or 200 basis points. That is one.
Secondly in terms of the grandfathered loans from banks and including debentures and everything, what could be expected in terms of a normal rundown is almost two thirds of our borrowings could run down in the normal course and one third could be run down in the next financial year. And if we talk of doing some part of it as prepayments probably the two thirds could be as good as three-fourths of our existing borrowings— grandfathered loans—could run off in this year.
Okay, one last number. What was your net interest margin (NIM) in the first quarter, what do you expect to end the year with in terms of NIMS?
That we will be able to clarify better post our half-yearly results. So let us keep it at that. But definitely this heralds, in terms of at least the scheduled commercial bank, the opening up for bringing down our cost of borrowings heralds definitely a better position.
The guidance that you have given us, roughly a 200 basis points reduction in cost of borrowing, that is over one year or are we talking about maybe two financial years? How many months?
We are talking about that in one financial year. We are talking March 2017-March 2018.
Two-third of our borrowings could run down in the normal course, the rest in FY19: CEO Sudha Suresh