Faced with high group lending defaults, SFBs move towards individuals

With a majority of small finance banks already operational, a challenging start has already forced a number of them to tweak lending strategies.

Due to demonetisation, coupled with rumours of debt waiver, the delinquency rates for micro-lending has shot up as high as 10 per cent, against about one to two per cent prior to demonetisation.

Hence, to bypass the risk associated with group lending, several small finance banks are looking to quickly migrate to secure individual lending, mostly to non-agriculture sectors.

"We are planning to diversify our portfolio to minimise the risk associated with group lending. As a bank, that would anyway have been a focus area. However now, due to demonetization, there is an additional focus to move quicker than anticipated to individual lending," said Rajeev Yadav, MD and CEO, Fincare.

From about 90 per cent unsecured group lending portfolio, Fincare is looking to reduce it to around 50 per cent in the next three to four years.

Kerala-based ESAF small finance bank is also looking to reduce group lending portfolio from 95 per cent to 75 per cent by the end of this year. Meanwhile, with about six months of operations, the bank has garnered deposits of around 125 crore.

Suryoday small finance bank, which has completed about six months of operations, is now looking to migrate its micro finance group lending customers to the individual lending category. From about less than one per cent individual loan lending portfolio, the bank's individual loan portfolio now stands at around 5 per cent of the total lending. By the end of this year, the bank expects it to scale up to 25 per cent of the total lending. In the long term, the bank expects the group lending portfolio to be less than 40 per cent of its total lending, according to Baskar Babu, managing director and CEO, Suryoday Small Finance Bank. The bank has been rolling out products like working capital loans, housing loan and vehicle loans in its portfolio.

"We want to acquire the new customer through group lending, and want to graduate them into individual lending," said Babu.

Soon after demonetisation, in December 2016, the Reserve Bank of India (RBI) had granted additional 60 days for repayment of certain loans, including microfinance loans, which were due between November 1-December 1, 2016. Later, it extended the repayment tenure by another 30 days, giving farmers a window of about 90 days extra to repay loans due within the stipulated period. Meanwhile, the buzz of debt waiver severely impacted recovery in states like Uttar Pradesh, Maharashtra, Uttarakhand, Madhya Pradesh and Karnataka. The microfinance loans collection had come down to around 85 per cent, against nearly 99 per cent prior to demonetisation.

Small finance banks have been relying heavily on group lending so long.

Notably, Bandhan Bank, which has a substantial portion, nearly 90 per cent of its business coming from the micro loan, saw a substantial rise in non performing assets (NPAs) due to farm loan waiver. Most of the loans were for allied agriculture activities and did not qualify for debt waiver.

"Farm loan waiver in Maharashtra and Uttar Pradesh has affected the repayment culture. The small borrowers have stopped repaying all kinds of loans, which has affected the overall repayment," CS Ghosh, managing director and chief executive officer, Bandhan Bank, had recently said.

As on June 30, 2017, the Bandhan Bank's gross NPAs rose to Rs 175 crore, accounting for 0.82 per cent, against 0.22 per cent in the same period last year.

Earlier, HDFC Bank saw its gross NPAs ratio rise to the highest in seven years, mainly on account of farm loan waiver. The bank's gross NPA ratio rose to 1.24 per cent for the June quarter from 1.04 per cent in the corresponding quarter a year ago.

Change in Strategy

* Fincare looking to reduce group lending to 50% in 3-4 years

* Suryoday looking to reduce group lending portfolio to 75% by this year

* ESAF looking to reduce group lending portfolio to 75% by the end of this year

* Demonitisation has led to rise in delinquency rate to nearly 10% in micro lending

* SFBs are rolling out products loans for vehicles, homes and to shopkeepers loans in retail category