MFI stress to weigh on small finance banks’ loan growth, asset quality

“In the short term, both the things do happen. Because lenders will disburse less now and as rejection rates go up, banks will have to relook at their growth," Singh said adding that Utkarsh Small Finance Bank is also likely to see some impact on asset quality.

“We have seen some stress in microfinance. The major challenge is over lending, and once that is taken care, in a matter of 3-4 months it should go back to the normal level," he said.

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“We have seen some stress in the microfinance sector. The major challenge is in lending, and once that is taken care of, in a matter of 3-4 months it should go back to the normal level," he said.

Self regulation

The recent guardrails put in place by MFI self regulatory organisation MFIN could also lead to some amount of disruptions, Singh said. He was speaking on the sidelines of an event to announce the launch of a co-branded credit card on the RuPay network, WhatsApp banking services and onboarding of Mary Kom and Sunil Chhetri as brand ambassadors of the bank.

Instead, the bank is looking to focus on its secured credit card product wherein it has tied-up with Walmart-backed super.money to offer loans ranging from ₹90 to ₹9 lakh, against a fixed deposit (FD) opened with the bank.

“We are seeing a lot of potential in this segment, especially coupling with our core geography. We may not be very aggressive in the beginning in Mumbai or Bengaluru type of places and instead go up to the interiors of credit-starved states such as Bihar, Jharkhand, Chhattisgarh and Madhya Pradesh," Singh told Mint.

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“Our idea is to give the credit card to more and more people. In fact, there may be lot of people who are first timers or new-to-credit (NTC). The combination of secured products and geography should give us a good volume."

The product will take at least 3-6 months to really take-off, he said adding that while the initial benefit is expected to be seen on the lending side, it is also expected to start contributing to deposit mobilisation over the next 2-3 years.

Normalisation of rates

On the recent comments by Reserve Bank of India Deputy Governor Swaminathan J. regarding excessive interest rates and unsurious fees being charged by small finance banks, Singh said that the bank has undertaken some exercises for normalisation of rates.

“We have done some normalisation in MFI. Earlier we used to offer the same rate to every customer. But now we have said that based on the track record and if the customer is there for a long time and has a good repayment track record, we will offer reduced rates," Singh said.

Subsequently, rates on the liability side, too, will normalise as lending rates ease and as the central bank decides to cut the repo rate.

“The rate of interest will come down from here and our reliance on large value deposits has also gone down significantly and will continue to go down. Our focus is more on the retail term deposits," Singh said, adding that the advantage there is that the bank can cross-sell other loan, liability and third-party products such as insurance and mutual funds to such depositors.

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Currently, bulk deposits account for around 33% of the bank’s total deposits but this share is steadily coming down, he said, adding that the bank is “broad-basing". An increase in yields in some lending buckets such as MSME loans is also helping neutralise the impact of elevated deposit rates and support margins and profitability.

“When we started, even retail LAP (loans against property), our rates were low. Also the portfolio is changing. We are focusing more on segments like micro LAP. The moment you bring the ticket size down, the yield goes up. So we are in the process of doing that part," he said.