Slowdown hasn't hurt small finance banks: ESAF Small Finance Bank CEO

ESAF Small Finance Bank, which began operations in March 2017, saw an over threefold jump in its net profit to Rs 90 crore in 2018-19. Managing Director and Chief Executive Officer K Paul Thomas tells Somesh Jha that small finance banks (SFBs) are robust and have not been impacted by the economic slowdown. Edited excerpts:
 
The regulatory deadline to launch an initial public offering (IPO) for some SFBs, including ESAF Small Finance Bank, is approaching. How are you preparing for it?
 
Our deadline is July 2021 since we crossed net worth of Rs 500 crore in July 2018 (so it should be three years from that time). We have started internal preparations and hired a merchant banker.

 

When we had last met in December 2017, you said you were looking to raise money from foreign players too. How has it progressed?
 
We raised two rounds of capital in 2018 totalling Rs 364 crore, mostly from domestic insurance companies, including PNB Metlife, Bajaj, ICICI Lombard and a few high-net-worth individuals. So, we found good opportunity in domestic investors.
Do you need further capital this financial year?
 
At present, we are well placed and our capital adequacy is at 26 per cent. We don’t require additional funding this year. Anyway we are planning to go to market and will raise money through the IPO. Before that, we haven’t decided on capital and we are comfortable on the assets side.

 
We have seen a credit slowdown when it comes to commercial banks. What happened in the SFB segment in the last one year?
 
All SFBs are growing on the credit side also. We saw a credit growth of 30 per cent last one year. SFBs have multiple options for liquidity mobilisation so the sector remained unaffected. Most SFBs transformed from micro finance institutions so majority of the books remain small ticket in nature and non-performing assets are low.
 
What about recent months?
 
We have been disbursing monthly loans of Rs 450-500 crore on an average. In July and August, few districts in Kerala saw impact because of floods and similar was the case in parts of Madhya Pradesh and Maharashtra. Good monsoon will help the rural market. I was in Coimbatore recently, interacting with farmer group companies who were optimistic about crop output because of good rains this year compared to last year. As a result, in another six months, rural demand will improve.

 
The Reserve Bank of India (RBI) gave you nod in December 2018 to operate as a scheduled bank. What has changed?
 
The advantage is that we will be able to reach out to registered trust and societies. In July 2018, the RBI permitted us to access NRE (non-resident external) deposits which gave us momentum in terms of retail deposits. In 15 months, we crossed Rs 1,000 crore in NRE deposits which is a big achievement. Otherwise, 90 per cent of our deposits of Rs 6,150 crore are small ticket.
 
How will a cut in corporation tax benefit you?

 
We will see a 3 per cent increase in profitability as we are a start-up bank and will fall in the 25 per cent bracket.
 
The RBI has issued draft guidelines for on-tap licence for SFBs recently. How do you see the move?
 
Barring the minimum capital requirements — which was Rs 100 crore when we applied and now it has been changed to Rs 200 crore — nothing much has changed. Further, promoters’ stake has to be brought down, over a period of 15 years, to 15 per cent, in line with the draft norms. In our case it stood at 25 per cent. Otherwise, I haven’t observed much of a change.

 
So are you bracing for competition in the sector?
 
Even today, there are non-banking financial companies (NBFCs), co-operative banks, micro-finance institutions to compete with. Competition was prevalent when we had launched too. Though the RBI has allowed urban co-operative banks to convert into SFBs but none of them has done it so far. A new bank will take 1.5-2 years to set up and by that time, our customer base will be stronger. In India, there is a huge market opportunity as a large number of low- and middle-income segments, which account for around 600 million people, are still underserved.

 
How are you seeing recent developments in the financial sector?
 
There are some uncertainties in financial services sector. When you talk about NBFCs, small and medium-sized ones, which were not totally dependent on market funding, were not impacted. For large NBFCs, structural issues still persist and it may take some time for them to get out of it. In the past, we have seen failure of co-operative banks but not at this scale. I hope and expect that there will be stricter regulations for co-operative banks in future.
 
Do you think converting co-operative banks into SFBs can be a viable solution?

 
It is a viable solution but I doubt how they will be able to meet the criteria while being co-operative in nature.