Disha Microfin operates across six states and one union territory and currently has a loan portfolio of about Rs 1,500 crore. The MFI claims it has an integrated technology platform comprising of mobile-based field force automation and web-based loan origination system that automates loan processing and credit checks leading to paperless underwriting. Rajeev Yadav, CEO, Disha Microfin, tells Shakti Patra that his focus is to replace the current bank-funded liability model with a deposit-funded one even if it is a costly exercise in the initial years. Excerpts:
Disha is the smallest SFB licencee in terms of asset base, could you give us a sense of your preparedness…
Disha Microfin, which has been given an in-principle approval to operate an SFB has a relatively smaller balance sheet, but when it comes to the overall Fincare Promoter group, as Reserve Bank of India (RBI) defines it, there are two other companies that we are operating the entire business under. There’s another non-banking financial company micro finance institution (NBFC MFI) – Future Financial Servicess – and a bank partnership company – Lok Management Services. The licence has been given to Disha for the overall group and we have to merge these three companies to form an SFB. Their current combined asset size is about Rs 1,500 crore. When RBI underwrote our application, it did so for all the companies put together. So, we don’t stack up as small as some people see us sometimes.
The foreign holding is higher than mandated…
Currently, foreign investment is 74% in our company and our net worth is over Rs 200 crore. We have initiated the processes to raise about Rs 300-400 crore via private placements and should be able to close the transactions in the next 60 to 90 days. Thereafter, we intend to start operations as a bank in the last quarter of the current calendar year.
What kind of yields, cost of funds and spreads are you currently working with? How have they moved over the last couple of years?
Given that our cost of funds is dropping, we are lowering our yields commensurately and maintaining spreads below 10%, in line with regulations. Currently, we offer MFI loans starting at 22% and going to a maximum of 25.75%, which is a drop from about 26-27% earlier. This is in line with the drop in our cost of funds by 200 to 250 bps during the same period.
Where do you source your funds?
Roughly 60% of our funds are sourced via bank loans and FIs, 30% through securitisation and about 10% from NCDs. Over time, however, we intend to increase the share of NCDs and other instruments.
Has this mix changed in the last couple of years? Is there a move in favour of NCDs in anticipation of bank lending drying up once you become an SFB? As of today, which is the cheapest source of funding for you?
I would say the mix has moved marginally in favour of NCDs – from about 5-7% earlier to the current 10% – although we will see a more dramatic change in FY17.
With MFIs growing at the rate at which they have been in the last few years, while maintaining an excellent credit quality, and banks having limited risk balanced options in other sectors, the attractiveness of the industry has improved, thereby reducing the rate at which it is lent to at. On the other hand, securitisation, which is primarily a vehicle used in the last quarter of the year, tends to offer the lowest rates due to PSL requirements. So, while we have seen a drop in our cost of funds across all the three categories, securitisation continues to be the most attractive, followed by bank loans and NCDs in that order.
As far as bank lending to us drying up is concerned, our existing loans from banks will obviously now be grandfathered. Secondly, if we have excess PSL, which most SFBs should likely have, we can trade them with banks that have a shortfall of PSL. So, there are means to create liquidity/fee income that won’t dry up completely just because we are becoming a bank.
What quantum of deposits do you hope to mobilise as an SFB? How much of an impact do you think they will have on your overall cost of funds?
Principally speaking, the objective of the first two years is to create the capability in the organisation to substitute a bank-funded liability model with a model that is deposit-led. With this in mind, we expect about 60-65% of our balance sheet being funded by deposits in about two years, even if they come at 50-100 bps higher cost, accounting for people and technology investment etc. that needs to be made upfront.