 "Higher share of MSME and housing loans to push up total credit costs: Ujjivan management")
In recent years, share of individual loans has increased in your portfolio. What attracts you to this segment?
Sudha Suresh: There is a huge market opportunity in the individual micro SME space. The micro SME loans are typically between Rs 50,000 to Rs 10 lakhs some loans could also be between Rs 10 lakh to Rs 20 lakhs and is divided into secured and unsecured. Typically unsecured lending could be anywhere between Rs 50,000 to Rs 2 lakhs. Anything above Rs 2 lakhs will be a secured loan. So there is huge opportunity in this bandwidth.
Are your credit costs sustainable at current levels?
Samit Ghosh: The credit costs of group lending business is very low while those relating to individual loans for micro SMEs is definitely higher than group lending. To that extent our credit costs will go up. The standard asset provisioning for group lending is 1% even though our actual cost is much lower. Whereas for individual lending it is over 2%. With increase of Micro SME & Housing loan share in overall business, the total credit costs may go up a little.
What are the challenges you see going forward?
Samit Ghosh: We have done a lot of research, we know what the customer wants. Access, service and a hassle free experience. To deliver that and be able to convert them from unorganised to organised would be a challenge. And there is no path laid out on the liability side. The whole retail liability strategy we have is an unchartered path. On the asset side again when we are moving into the missing middle it is an unchartered path. Building up that expertise and doing that business well I think those are the two major challenges and one has to prepare very hard for it.
How is the SFB transition progressing? When will it be operational?
Samit Ghosh: We really needed to supplement our existing technology which was already pretty advanced. We already have existing systems like group lending, collection software, data warehousing, amongst others. We had to just supplement couple of new systems. One is a core banking system for liabilities and second a relatively simple treasury system. So we are in the final stages of the transition. We are supposed to start by 7th of April 2017, as per SFB guidelines. But we are planning to start in the first quarter of 2017 when we will do a soft launch and complete our final launch by end of March 2017. 90% of management team is in place for the SFB. Largely it’s the same team as in Ujjivan. We did not have to do too much of new recruitment.
What is your strategy in scaling up the SFB’s assets as well as deposits?
Samit Ghosh: On the loan side, our portfolio is predominantly into group lending. But about three years back we started lending to micro SME and home loans which form about 12% of our portfolio on a combined basis. We expect this portion of the portfolio to grow much higher in proportion to what we have today and form a major share in the business in the next 4-5 years. Our primary focus would be on the micro SME. We started with home improvement and then moved into micro housing segment. Very frankly probably we would have to go to a slightly higher segment for home loans and it would be largely in the semi-urban towns. What we found is that there is a tremendous demand for home improvement. Bulk of our housing portfolio is in that category.
On the deposit side, our focus would remain with the unbanked and under banked. We are not planning to move into middle class or affluent. So we expect that our existing borrowing customers will be able to provide 40% of our liabilities. But beyond that it would largely come from one or two economic segments higher than our current group lending segment. These are micro entrepreneurs and salaried lower middle class borrowers who actually right now save largely with the unorganised sector. Our target is to convert savings lying with the unorganised sector like chit funds, etc and bring them within the fold of the banking sector.
On CASA, the current account balances with banks actually comes from cash management services. Given the customer segment we are dealing with, we can offer some rudimentary cash management services for micro enterpreneurs, but we cannot expect too much on the current account front. Our focus will be largely on the savings account and fixed/term deposits. It will take 2-3 years to achieve atleast 20% CASA levels for the SFB.
Your return ratios will be compressed over the next few years as you transition and grow the SFB. How do you expect these to pan out in the longer run?
Sudha Suresh: We have excellent return ratios right now. As we transition into an SFB automatically there is an initial transformation and transition phase where we will incur a lot of costs. Also there are certain expectations RBI has from us in terms of returns. So we will be keeping both in mind. We should be comfortably looking at a steady state of returns which should also be ok with the regulators.
Samit Ghosh: First couple of years, we see moderate pressure on the return ratios because we will have incremental costs on one hand but on the other hand our borrowing costs will drop because the term borrowing which we do now is at a much higher cost than inter-bank and other things which we can do after becoming an SFB. We expect our cost of funds may drop by approximately two%. After two years, return ratios will be on track to current levels.
Your cost of funds have moved up in the past year. What is the reason?
Sudha Suresh: Typically there are huge borrowings at March ending. Whereas if you look at any other quarter we will just keep the funds that we require. We can close our quarterly balance sheet with as low as Rs25 crore or Rs 60 crore whereas March numbers will be Rs 400-Rs 600 crore. This creates an anamoly when you actually calculate the ratio it shows an increase in costs. However, our costs of borrowings have come down steadily and our average cost of borrowings is coming down further. Average cost of borrowings is 12% but we are able to borrow from banks at 10.5 to 11%. Average lending rate is 22%.
What will be the FII holding in Ujjivan post IPO?
Sudha Suresh: FII holding has reduced from 91% to 77% post pre-IPO placement and will fall further to 44-45% levels post the issue. After including ESOPs, the FII holding will fall well below 40%.