‘Our Book Size will Be ₹ 10,000 Cr in 5 Years’
Utkarsh Small Finance Bank is looking to tap into multiple opportunities after it started operations in January as the first commercial bank headquartered in the Hindi heartland, its managing director Govind Singh told Joel Rebello in an interview. It was among the 10 entities which were given an in-principle approval by the Reserve Bank of India in September 2015 to start a new kind of banks lending to small businesses. Edited excerpts:
How do you see this opportunity to operate a small finance bank? We have an existing client base but as an MFI (microfinance institution), we could only give loans. As a bank, we can offer all products. An NBFC (non-banking financial company) requires a licence for each financing activity. We can now cater to all types of customer segments. So, in terms of opportunity it’s huge in the core geography of Uttar Pradesh, Bihar and the eastern India we are operating in. It’s a win-win for all — our clients require it, we need more clients and we can offer more products to our clients. We are also looking at MSME (micro, small and medium enterprises) with a ₹ 1-lakh ticket size on average right now. Our MSME loan book is just ₹ 80 crore. We are looking at a higher ticket range, which we have not done so far. In housing also, we have started a pilot and are also looking at commercial-vehicle financing in a year’s time, along with twowheeler programme and personal loan. In percentage terms, the microfinance portfolio will come down to 50% in the next four years. We will build more MSME and in the personal segment, but not large ticket corporate because we don’t have the money or capability for that.
What kind of businesses will you lend to? Our sweet spot in terms of individuals is between ₹ 6,000 and ₹ 1 crore, and even if we do wholesale lending it will be ₹ 5-10 crore, where we will do very small transactions – five to 10 transactions for ₹ 100 crore portfolio; 95% of our portfolio will be below ₹ 5 lakh. But the main part is we can now raise liabilities also. Our current cost of funds is more than 12% because we have to take loans from banks. It used to be in the 13.5% to 14% range a year ago. We expect it to come down to 9-9.5% in the next one year depending on how quickly we can garner deposits. It will also be broad-based because we will have a few lakh depositors. My focus will be on lower and middle segment but it will be broadbased with many products.
Which areas will you focus on? At least in the near future we intend to restrict to our core geography like UP, Bihar, Jharkhand, Chhattisgarh, Madhya Pradesh, some portions of Haryana and Uttarakhand. We are also contemplating Odisha. More than 65% branches are in UP and Bihar, and that will be the case for the next few years. We will not compete with large banks. There could be a challenge from NBFCs, but we have advantages compared to them. We are the only bank licensed from that geography and the only non-cooperative non-RRB (regional rural bank) headquartered in that area. So we face limited competition.
Which small industries are you targeting? What we have been doing is giving loans, not for consumption but for income generation. As long as there is an activity that is sustainable and scalable, and which requires funding, we are willing to support it. In villages, you have clusters like animal husbandry in Mirzapur; in Varanasi, there is a loom business. There are some clusters where even from a credit angle we have better expertise. Our preference is for those businesses. But it does not mean that we won’t fund outside the cluster. This fiscal year we are targeting more than ₹ 300 crore from MSME. MSME, together with housing and CV (commercial vehicles), will be in the range of ₹ 3,000 crore in five years’ time. Our book size will be around ₹ 10,000 crore in five years from ₹ 1,800 crore now; 35% of our book will come from MSME 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 the first-time borrowers? We create a rough financial statement by asking them about their income, expenses and business, which is what the established banks don’t do. That is where our expertise comes handy. Getting foolproof accounting books is difficult. We do it on our own. Our sales team and credit team meet the people and see their activity, and make their assessment on that basis. That’s why it is not a balance sheet assessment. Our people look at cash flows and try to match to what the borrower is saying. Our employees are trained specially for this.
Your plan in terms of branches and people? Our new branches will not be into microfinance. The new branches, especially in the cities, will be focused on personal loans and liabilities. Our microfinance branches will also do liabilities together with third-party products like insurance and mutual funds. We have about 3,900 employees now, up from 2,300, when we got licence. We expect to be close to 4,700 by March 2018 and, as the book size grows, around 9,000 in five years’ time. We have a big focus on getting local employees and freshers because their stickiness is higher and freshers can be modelled easily. In new geographies we are looking at business correspondent model because we will not have to set up new branches and it will help us grow in new places like Odisha at a faster pace.