Small finance banks raising deposits to replace high-cost loans

With eight out of 10 small finance banks (SFBs) having become operational, aggressive deposit mobilisation in the first year has turned out to be the key strategy for almost all the new entities.
 

In addition, the new-age banks are betting big on technology to reduce the cost of operations.
 

All the SFBs are offering up to 100-150-basis-point higher interest rates (over market rates) on term deposits.

This apart, some of the banks are eyeing bulk or corporate deposits. The idea behind the move is to replace high-cost loans taken by SFBs as microfinance institutions with relatively low-cost deposits.

“Our highest interest rate on fixed deposits is around 8 per cent, and is in general one percentage point higher than the prevailing market rate. We are looking for both bulk and retail deposits, and aiming to replace high-cost loans with low-cost deposits. We are also raising deposits through CDs (certificates of deposits),” said Samit Ghosh, managing director (MD) and chief executive officer (CEO), Ujjivan Small Finance Bank.

The highest interest rate offered by Varanasi-based Utkarsh Small Finance on term deposits is 8.5 per cent. The bank has set a target of mobilising at least Rs 2,000 crore by the end of March next year. 

“We have a two-pronged strategy for deposit mobilisation. First, we are focusing on having high-value bulk deposits from the corporate sector. We are eyeing entities like high net worth individuals, non-banking finance companies (NBFC), and regional rural banks. For retail deposits, we are looking at our existing microfinance customer base, as well as their family members and neighbours. This apart, a new set of customers in urban and semi-urban areas, who have been keeping money in banks, are also on the radar,” said Govind Singh, MD and CEO, Utkarsh Small Finance Bank. 

The bank is looking to digitise its transactions, including those in rural areas, in the next few months, according to Singh. 

Kerala-based ESAF, a small finance bank, which has completed close to six months in the trade, has mobilised close to Rs 1,040 crore. The bank is offering 9 per cent, one of the highest rates in the market, for deposits of more than one year and less than three years. 

In view of falling interest rates, and in alignment with rates offered by other SFBs, ESAF is planning to review its interest rates next week, according to K Paul Thomas, MD and CEO, ESAF. 

The bank has rolled out tab (tablet) banking for smoother transactions in rural areas and is looking to diversify its loan portfolio in sectors like small and medium enterprises, and housing and agriculture finance. 

Suryoday Small Finance Bank, which has been offering 8.75 per cent for a period of more than 24 months and less than 36 months, is looking to continue offering higher interest rates till its deposit pool reaches about Rs 500 crore. 

The bank is looking to reduce its operational costs by at least 100 basis points through tab banking, according to R Baskar Babu, MD and CEO.  

“Technology will play a big role in our day-to-day operations. We have found that nearly 75 per cent of our customers have at least one smart phone user in their families. We are aiming to digitise all the transactions, and route them through tab banking. This should reduce the cost of operations by at least 100 basis points,” said Babu.

While offering high rates on interest on deposits, most of the SFBs are keeping interest rates on loan products on the higher side. At present, the marginal cost-based lending rate for most SFBs is 14-16 per cent, according to a report by Kotak Institutional Equities. The interest rate offered on savings accounts for most SFBs is around 6 per cent. However, Ujjivan is offering a 4 per cent interest rate.