Demonetisation will help SMEs in long-run, says Federal Bank

Expects 50 basis point reduction in rates due to demonetisation, said Bank MD Shyam Srinivasan

At a time when many, mainly small and medium enterprises (SMEs), are crying about Government's demonetisation decision, Kerala-based Federal Bank which focusses on SMEs expect that the pain is short-term but in the long run this would help SMEs to access credit at a competitive price.

The bank which expects 50 basis point reduction in rates owing to the demonetisation efforts started on November 8, says that its digital products are getting better traction post demonetisation. The volume, especially of the new transactions, has been growing and the ticket size is lesser, which shows that most of it are daily cash transactions and that is a good sign, said Shyam Srinivasan, managing director of Federal Bank Ltd.

 

The Bank claims its new internet banking rose by 30 per cent, while mobile banking has risen by 50 per cent and digital transactions rose by 30 per cent. The missed call transactions have gone up by 50 per cent. This medium allows customers to recharge telephone and transfer fund, the ceiling is Rs 1,000 and Rs 5,000 respectively.

"Our aspiration is to be the amongst the most admired middle market SME banks digitally enabled. The current situation is working out in favour of the aspiration," he said.

SMEs have struggled to get credit as their ability to demonstrate transaction and business momentum was weak. With more transactions happening digitally, these transaction records are visible and banks can take decisions on credit based on this record. More people are likely to get credit, due to this, they said.

"If you have a good track record, you are going to command money at a much lesser cost," he added.

This will also help to bring down the cost and interest. While several things have to be looked at in terms of interest rate reduction, demonetisation per se would increase the kind of liquidity into the system, about a 50 basis point reduction should be possible in the next two-quarters.

The bank has various products in the digital space including Lotza, its UPI app for bank-to-bank transfer of money up to Rs 1 lakh. It also introduced missed call recharge for recharge of prepaid mobile balance and missed call transaction, which could be done through feature phones also.

He said that demonetisation will put short-term pressure on the bank, but in long term, it would benefit its operations.

The bank which went through tough times till two years back is now back in growth track and says it is targeting 20 per cent growth. While in the current course and speed, it may not require fund raising till the middle of the calender year 2018, but if there is any requirement, it may look at raising capital by sometime in 2017-18.

It is also expanding its presence overseas. With two representative offices - one in Dubai and another one in Abu Dhabi - it has the approval to start a branch in Bahrain and would look at three more locations as it has applied for regulatory approval. It has also approval to open a branch in Dubai International Financial Centre (DIFC), which would help it in raising foreign capital.