 "Becoming a bank will not give players an edge in micro finance space: S Dilli Raj")
SKS Microfinance, one of the important entities in the sector, lost in the recent race to win a small finance bank licence but doesn’t believe it will have an impact on the business. S Dilli Raj, its president, tells Manojit Saha and Nupur Anand he doesn’t expect competition to increase significantly with the coming of the new niche banks. Edited excerpts:
Why do you think you did not get a small finance bank licence?
A missed opportunity but not a setback. The regulator doesn’t give you direct feedback but the other stakeholders will take a look at it and then evaluate the reasons. It appears (one reason was) we don’t have a domestic promoter, unlike the others. The other cases might not have the 26 per cent or the 40 per cent required shareholding but they do have a domestic promoter, specific and identifiable, unlike us.
Also pointed out by analysts is that none of those which got the licence had any exposure in Andhra Pradesh (where the micro finance sector had crashed in the recent past). We had exposure in that state, though we have cleansed the book and written it (loans) off; still, some people are drawing that as a related reason.
It is believed that for getting a licence, deep pockets and a five-year operational history was the key. Where do you think you had exactly missed out?
The fact is that we did not have domestic promoters. To get there, the capitalisation need would have been a factor. In our case, that would have been to the tune of Rs 3,000 crore if domestic equity had to be brought up from 30 per cent to 51 per cent (of the total).
In the past five years, we made profits in FY11, FY14 and in FY15, and we have absorbed the losses we made in FY12 and FY13. We now have a tangible net worth of Rs 1,115 crore, post the adjustments.
The Reserve Bank has said it will be introducing on-tap licencing for niche banks. Will you apply again?
RBI is yet to formulate the operative guidelines. One needs to wait for it and then evaluate.
Though the markets reacted negatively some analysts said SKS would not be adversely impacted by losing out on the licence.
What is your reading?
If you look at what a bank structure brings in, the perception is that it could reduce your cost of borrowing and operating cost. It could also throw some market expansion opportunities and, for us, it could also mitigate political risks. But, let me tell you why we will not be left out. The perception that the cost of borrowing for a bank is lower is driven by the fact that it would give access to dedicated refinance lines, concessional rates and if you build the Casa (current account and savings account) franchise.
Yet, in the past six months, the doors of refinancing has opened for non-bank finance-MFIs as well, via MUDRA and Nabard. And, on Casa, one is aware that it takes long to build and make it competitive.
What will be the biggest challenge for the players that have won a small finance bank licence?
Most of them will have the issue of raising domestic equity. This takes a lot of management bandwidth and the fact that the pool will be limited to domestic investors will be a challenge. Historically, and even today, the bulk of investments in MFI in India is from foreign equity.
The second challenge is that meaningful domestic equity will come to you only if you are listed, as there are regulations that preclude certain investors from investing in an unlisted company. Getting an Initial Public Offer ready is a challenge in itself.
What is your cost of borrowing?
The lowest in the sector, at 11.8 per cent. We charge 20.75 per cent to our customers, which is 300-400 basis points lower than what other players typically charge. Our cost of borrowing reduced by about 300 bps in the past one and a half years. As a result, we reduced our lending rate by 380 bps between October this year and last year. Cost of borrowing came down because of our balance sheet strength and our rating, highest in the sector. And, because of our reputation after the (Andhra and subsequent) crisis. We repaid Rs 5,800 crore (gross) to the banking system, instead of taking a haircut or going for restructuring.
With the new niche banks, competitive intensity will increase. How do you see that impacting business?
I don’t think structural changes will increase the scope of activities. There are 40 other banks already and the demand in this market is available to you if you have a model and a bottom-heavy structure to offer collateral-free credit, and can complete the credit clauses at the doorstep of rural women. If being a bank gave you an advantage, no MFIs would have survived.
Why do you think you did not get a small finance bank licence?
A missed opportunity but not a setback. The regulator doesn’t give you direct feedback but the other stakeholders will take a look at it and then evaluate the reasons. It appears (one reason was) we don’t have a domestic promoter, unlike the others. The other cases might not have the 26 per cent or the 40 per cent required shareholding but they do have a domestic promoter, specific and identifiable, unlike us.
Also pointed out by analysts is that none of those which got the licence had any exposure in Andhra Pradesh (where the micro finance sector had crashed in the recent past). We had exposure in that state, though we have cleansed the book and written it (loans) off; still, some people are drawing that as a related reason.
It is believed that for getting a licence, deep pockets and a five-year operational history was the key. Where do you think you had exactly missed out?
The fact is that we did not have domestic promoters. To get there, the capitalisation need would have been a factor. In our case, that would have been to the tune of Rs 3,000 crore if domestic equity had to be brought up from 30 per cent to 51 per cent (of the total).
In the past five years, we made profits in FY11, FY14 and in FY15, and we have absorbed the losses we made in FY12 and FY13. We now have a tangible net worth of Rs 1,115 crore, post the adjustments.
The Reserve Bank has said it will be introducing on-tap licencing for niche banks. Will you apply again?
RBI is yet to formulate the operative guidelines. One needs to wait for it and then evaluate.
Though the markets reacted negatively some analysts said SKS would not be adversely impacted by losing out on the licence.
What is your reading?
If you look at what a bank structure brings in, the perception is that it could reduce your cost of borrowing and operating cost. It could also throw some market expansion opportunities and, for us, it could also mitigate political risks. But, let me tell you why we will not be left out. The perception that the cost of borrowing for a bank is lower is driven by the fact that it would give access to dedicated refinance lines, concessional rates and if you build the Casa (current account and savings account) franchise.
Yet, in the past six months, the doors of refinancing has opened for non-bank finance-MFIs as well, via MUDRA and Nabard. And, on Casa, one is aware that it takes long to build and make it competitive.
What will be the biggest challenge for the players that have won a small finance bank licence?
Most of them will have the issue of raising domestic equity. This takes a lot of management bandwidth and the fact that the pool will be limited to domestic investors will be a challenge. Historically, and even today, the bulk of investments in MFI in India is from foreign equity.
The second challenge is that meaningful domestic equity will come to you only if you are listed, as there are regulations that preclude certain investors from investing in an unlisted company. Getting an Initial Public Offer ready is a challenge in itself.
What is your cost of borrowing?
The lowest in the sector, at 11.8 per cent. We charge 20.75 per cent to our customers, which is 300-400 basis points lower than what other players typically charge. Our cost of borrowing reduced by about 300 bps in the past one and a half years. As a result, we reduced our lending rate by 380 bps between October this year and last year. Cost of borrowing came down because of our balance sheet strength and our rating, highest in the sector. And, because of our reputation after the (Andhra and subsequent) crisis. We repaid Rs 5,800 crore (gross) to the banking system, instead of taking a haircut or going for restructuring.
With the new niche banks, competitive intensity will increase. How do you see that impacting business?
I don’t think structural changes will increase the scope of activities. There are 40 other banks already and the demand in this market is available to you if you have a model and a bottom-heavy structure to offer collateral-free credit, and can complete the credit clauses at the doorstep of rural women. If being a bank gave you an advantage, no MFIs would have survived.