BS SFB Round Table: Rural, urban India show little difference, say experts

At Business Standard Unlock BFSI 2.0, some of the best minds from the SFB sector discuss the consequences of the lockdown, the urban- rural divide, capital-raising plans, and the way forward for SFBs

The pandemic and the ensuing lockdown hit the vulnerable sections of the population the hardest. Small finance banks (SFBs), which deliver banking services to these sections in rural and urban areas, also suffered. At Business Standard Unlock BFSI 2.0, some of the best minds from the SFB sector — AU SFB MD & CEO Sanjay Agarwal; Equitas SFB MD & CEO P N Vasudevan; Ujjivan SFB MD & CEO Nitin Chugh; Jana SFB MD & CEO Ajay Kanwal; Suryoday SFB Co-founder & CEO R Baskar Babu, and MFIN CEO Alok Misra — discuss the consequences of the lockdown, the urban- rural divide, capital-raising plans, and the way forward for SFBs. Edited excerpts:

What is your assessment of the situation?

Vasudevan: We are focused on the low end of the customer segment who do not have any documents — no paper, no income tax returns, nothing. And, we have to do a lot of diligent cash-flow assessment sitting in a shop, watching footfall, the number of sales taking place, extrapolating to monthly sales, and doing vendor verification to reconfirm whether our calculations on sales are correct. Practically, for most of our borrowers, we are their only bankers. And, the demand in this segment is very large, and mostly unmet.

We don’t have DSAs (direct selling agents). Most transactions are sourced through our existing customer references and the remaining through direct marketing by our own staff. So, because of these reasons, the relationship we tend to have with our customers is very strong. And almost all our customers deal with daily-use products and services. They’re not into luxury or discretionary products.

So, when there is a lockdown,  and he can’t open his shop, his income is zero. Given the profile of the customers to whom we lend, you can’t expect that they’ll have lots of savings and make their EMI payment out of savings. When they can’t earn, they don’t pay. But when they earn, they start paying. The speed of recovery is very fast, because of the fact that they deal in daily-use products and services.

Anil Kanwal, CEO Jama SFB; R Baskar Babu Co-founder & CEO, Suryoday SFB, Alok Misra CEO, MFIN

Chugh: We have a large proportion of customers who deal with essential services, such as groceries, dairy, agri, and the rural portfolio. They did keep telling us that there isn’t so much of an impact. Yes, there was a shrinkage in demand. They were not seeing as many customers coming to them, so obviously their cash flows were dented to a significant extent. But they also said that they saw recovery in demand. That gave us the confidence and optimism to believe in the resilience of the informal sector, and their inherent tendency to revert back to us, because they cannot stay out of economic activity.

In all the investor calls and media interactions that we had, we kept saying that we were very confident that our customer segments cannot remain economically inactive for a long time. They have to go back to their livelihood. And gradually, as things started to open up, we saw that people also came back and said, ‘I thought I would be able to pay you, but I need a little extension’. These were customers on the small-business side. I told them they had the option of extending it till the end of May. In June, when we started to go back into the field, that is where we saw the difference in actually being able to collect. There were customers who had told us even in April that though they had the money to pay us, there was no way they could come and pay us.

Misra: I totally agree that the livelihoods associated with the small-ticket sector are entering normalcy. In rural parts of India — I sit in Gurgaon and all of us are in state capitals — we saw there was a barrier, a movement barrier. Yes, the initial months saw some loss of business, but now businesses are coming back to normal. However, there is one uncertainty which I must flag. On the medical front, we do not know what will happen on Covid.

Which sectors have experienced pain?

Agarwal: We fund a lot of schools and allied activities such as school buses and teachers, and all those things have not not opened up and there is a lot of controversy about whether fees will be paid or not. So, that sector is not coming back at all. All luxury- or lifestyle-related items like gyms, electronics, high-end apparel are looking a little subdued. And, of course the hotel industry, which is not yet up. So, these are four or five things that are related to our market. Otherwise, all the discretionary and non-discretionary things are coming back.

Is rural India the new growth driver?

Misra: The asset class in microfinance which we deal with in both urban and rural areas pertains to real-life necessities and the impact may be a little higher in urban areas, because people have become more conscious after the pandemic. But otherwise, there would not be a major difference.

Agarwal: We have always been on the rural side, and we are seeing that rural areas are not affected that much. There is huge demand for tractors. We have also seen good demand for small business loans and housing loans. While vehicle loans are subdued, one thing which has surprised me is that there is a lot of demand for private vehicles.

Kanwal: Urban and rural will see a marginal difference when it comes to recovery. Being very rural-based is also challenging. So, remaining balanced would be the right answer for us.

Baskar Babu: It can’t be that rural will do extremely well, independent of urban. They are substantially interlinked, though rural contributes  only 16-20 per cent of the GDP. So what about the narrative that rural will help everything bounce back? This may not necessarily be true, but many of our customers’ households have multiple sources of income. So, we have seen that bounce-back happening at least with one income coming in, and it will bounce back quickly.

Where will credit growth come from this year?

Babu: I don’t think there would be any substantial growth in book size. It would probably be 5-10 per cent at best, compared to last year.

Vasudevan: We will not be in a position to give a guidance. The only thing is that demand in the segments that all of us operate in is unlimited. It has been unlimited, it has been huge. So, the whole challenge is how much appetite we have to do business. 

Is there a focus on new products to drive credit growth?

Chugh: Because of all the liquidity measures, there is a decrease in the cost of funds for all of us. That also gives us the chance to either launch new product lines or get into new segments. It could be through a calibrated approach, if not immediately, through tests and pilots, getting gradually getting into new lines of business and new product lines.

Is it easier to get deposits now, given the Covid situation?

Chugh: I don’t think we had an issue with deposit inflows. If you look at the rate reduction that the large banks have done, or that SFBs have done, it’s in the same proportion. Liabilities are not something that we were for before all this happened, and the situation has not changed. Liabilities were anyway coming up because of the proposition we had for our customers, and that continues to be so.

I have been talking to a lot of customers, and while there is rate sensitivity in certain segments, now people are realising the fact that they have been dealing with the bank for the last one, two, or three years, and they do see the difference in the way we serve them, compared to some of the other banks they deal with. So, people are also moving out of this whole rate sensitivity issue, and that is perhaps one of the biggest reasons why we continue to attract deposits.

Misra: Liquidity was and will continue to be the main challenge because, when SMEs (small and medium enterprises) were almost in the stabilisation phase — when all operating costs had stabilised, and core banking and technology costs were almost being stabilised — the pandemic hit. I had thought that from this year onward the take-off would start for SMEs, but the pandemic has delayed it a bit.

There are two types of liquid segments — one, small clients whose account balances are less than Rs 2 lakh or Rs 3 lakh of deposit insurance cover, and those who know and trust you, and whose deposits will come; and second, corporates who understand that it is not about how large or small the bank is, but how well-run and capitalised it is, and who will also be okay. It is the medium segment which goes by the brand name, and which also is very huge in India. That is still a big challenge.

Agarwal: I have a different view here, because size and scale matters. So, I would say the first Rs 10,000-20,000 crore of deposits are not a winner, honestly. But if you want to raise money at the level of Rs 50,000 crore-plus, you know then the people will really want to have trust in a brand. Because of what happened in the YES Bank case, the PMC Bank case, and some NBFCs, everybody is questioning us.

But two initiatives taken by the RBI and the government have really helped. One, they came out and said that every scheduled commercial bank in the country is safe and we won’t allow any commercial bank to go in a wrong direction. Second, they said we guarantee up to Rs 5 lakh.

Kanwal: Deposits and liquidity are no more a problem. Having said that, I do know that there is a crisis in the banking market, whether it is a PMC or an IL&FS, or whatever else. People do get nervous about whatever has happened to the bank, and as they have seen a PMC Bank event, they will always be nervous.

So, we continue to build our service and our brand, and every year the SFBs are evolving. People are saying, ‘listen, I was questioning this bank in 2016-17, but they are still around, and so, maybe I will start banking with them.’ So, with the years passing we will gain trust. We should remember that our history is only about three years old, so the path of evolution is real and we should all recognise that.

Are you talking to the RBI on the IPO issue?

Kanwal: We are doing all the work required to get the books ready for the public offering. There are a variety of areas where the SFBs have to engage with the RBI. We will do that now. We have an Association which was set up only in July. We will put all the issues together and seek their counsel.

Babu: There are ongoing discussions through our Association, but we are doing what is possible for ourselves. We are doing the DRHP filing and then there is the market. I am sure the regulator will be open, considering the Covid situation, to any dispensation and extension. We are doing what is in our hands.

Any plans to raise capital?

Agarwal: You have to raise capital to either protect your balance sheet, or you have to be sure about your growth. I am not sure about both these things, as of now.

What’s the new digital world in micro finance like?

Chugh: This is a great opportunity for all the transformational work that we could have done. Banks themselves will undergo a change in their business model, and that is clearly a logical outcome.

Vasudevan: In the micro-finance space, we are already a paperless brand. Before we became a bank itself, we were completely paperless. So, in the last three years we never made disbursements in cash. It has always been through a bank. But the only thing that people are now talking of is whether the collection, which is done by group meetings, can be done digitally instead of in cash. We will be watching the situation.

Misra: In a cash operating structure, we have the concept of ‘cash in, cash out’. When we disburse to ‘cash-in’ clients, it is 95-100 per cent digital. It goes into the bank account. As for ‘cash out’, which means repayment by the client to the institution, we have to give an option to the client. It’s still a far cry from going completely digital.