BS Banking Annual 2019: Banking is a very long-term biz, says USFB chief

Becoming a bank has given us more strength, says Jana SFB MD & CEO Ajay Kanwal

How is AU Small Finance Bank different from the others?

Sanjay Agarwal: Our journey from being a non-bank finance company (NBFC) to a bank has strengthened us. Our assets have grown by 40 per cent. Even as the last two years was not the best period, we have grown our deposit base also, because we were in the market for the last 24 years. We haven’t made a lot of mistakes in our journey as a NBFC. Structure-wise, we are very simple. The shares are held by me and my family, unlike the corporate umbrella seen in Mumbai. Our assets are small, high-yielding and non-performing asset (NPA) generation is low. And, we never give unsecured loans. Managing asset quality and being high on governance has worked for us.

Was it a mistake to become a bank because an MFI would have been easier from the compliance and trust perspective? 

Govind Singh: The whole point is that this is a journey. Banking is a very long-term business and the ultimate benefit will be visible after decades and not in years. Risk compliance, now as an SFB, is at least 20 times higher than it was for us as an NBFC. The requirements are huge in the initial phase when you set up the systems. We also have some structural issues, being a holding company, and need to bring down our holding to 40 per cent over two to three years. The other challenge is of getting funds on a regular basis. Currently, we are in the process of putting things in place. 

What are the other challenges for SFBs? 

R Baskar Babu: On the regulatory side, it was far less as an NBFC. On a lighter side, I visited the Reserve Bank of India three times in the first nine years, but more than 30 times in the last two years as an SFB. But, banking is a long haul business. Sometimes, as a start-up, we feel the pressure when compared with regular banks. Their CASA (current and savings accounts) share is 45-50 per cent. Trust, irrespective of whatever we do, takes time. And, when trust goes up, costs come down. Maintaining the trust becomes far more challenging. 

Getting human resources is a big challenge; as a start-up bank you don’t get people easily. The spread between the loans and advances and the cost of funds for a regular bank is 4 per cent. For us, even at 10 per cent, it becomes extremely difficult to stay meaningfully profitable. The key learning is that you will have to be clear about the pace at which you are comfortable growing, rather than being pushed to run at a higher pace. 

Why are payments banks taking time to get their model right? 

Srikrishnan: When payment banks guidelines were formalised, there was also a lot of interoperability between the KYC (know your customer) of telecom companies and the rest of the banking sector in 2016. The fundamental premise was that the telco KYC would be transferred. In 2018, it was reversed. Aadhaar, which is the digital on-boarding of a bank account, was not allowed after the Supreme Court verdict. So, the on-boarding of customers could not happen within the time, as planned earlier. Even before we started, there were more challenges. Since we are the big boys, we believe that we can be resilient, which is exactly why we are afloat. We commenced our operations on April 18, but it’s a live trial. Scaling up the reliability, technology and processes is important, as this is a scale business. It is not to be compared with SFBs, as they are operating on a regional basis, which is carved out of a very well established model. 

Payments banks are an experiment. I would not want to conclude that it failed or not. An experiment always continues. All of us need to work towards making it happen. The regulators have put their best foot forward by giving us a long leeway. The second phenomenon that happened is the fall of the wallet industry, which was operating on an unsustainable model. 

Jana SFB has become profitable again. Is it sustainable? 

Ajay Kanwal: Jana took two years to turn around. From the very first month, we focused on building a strong foundation of a bank. Three things make Jana strong: Compliance, risk culture and diversification. There were a lot of NPAs and everybody in Jana, from secretaries to CEOs, were sent on collections, which helped develop a sense of the risk culture. Liability franchise is also a crucial piece for the long-term sustainability of a financial institution. Third, we started our microfinance business after demonetisation, and we are running at less than one per cent loss. We are moving slowly and managing the risk. We have started affordable housing and MSME loans which are secured assets.

As a payments bank, what can you do which other banks cannot do? 

Srikrishnan: We started off with the payments banks products, but we’re looking beyond. My Jio, as an app, is moving away from a telco app to a telco-plus content app with integrated financial services. From the available balance on their SIM, customers watch TV, listen to music and also bank using the app. What differentiates a payments bank from a commercial bank is digitalisation. With access, we are also providing convenience and simplicity.

For SFBs, including Bandhan Bank, over 80 per cent of assets is microfinance loans. Why have SFBs not branched out? 

Kanwal: At Jana we have a focus group of about 2,000 people lending to micro enterprises both on unsecured and secured basis. Small enterprises are very informal on paperwork, both on GST and income. So, lending to them becomes a challenge in how you assess their ability to borrow and service loans. But, I can assure you both on Jana’s and the sector’s behalf that the focus on the bottom of the pyramid and smaller enterprises hasn’t gone away. Becoming a bank has given us more strength. But like any new start-up or any new bank, we have to do it carefully. We are working with fintechs that are better than us, and we are learning from them. 

Are SFBs finding it difficult to create trust and grow deposits after the PMC Bank crisis? 
 

Babu: After the PMC Bank crisis, we’ve had enquiries from depositors. But, there hasn’t been any substantial withdrawal of deposits. If a PMC-like situation happened to two-three cooperative banks, the crisis would have been manifold. As NBFCs what we have not done is liquidity management. All our liabilities were contractual. This is the first time we are dealing with the behavioural aspect of liabilities. So we’ll have to be cautious in terms of how we plan it. All of us have far more liquidity than required. If ever there is any stress even for one of the SFBs, it will have a big rub-off effect on all of us. Each one will have to have their own risk management.

Are you reaching out to customers on this?  

Agarwal: Here comes the whole idea of building a brand. We are engaging with customers — telling them how SFBs are in existence and how their balance sheet is. Generally, people get confused between all the finance models — public sector banks, private banks, NBFCs and SFBs. Now is a good time to help them understand the difference between keeping deposits with each of these models. It is up to us to get the narrative right and help people to understand. 

Instead of calling it small finance bank, should it be called financial inclusion bank? 

Kanwal: “Small” has an issue with most people as a word, that something is wrong with you. We could have called it something else.