One of the few SFB licencees with foreign shareholding below 49% — ESAF Microfinance — seems to be on track to start operations eight months before the RBI deadline. Speaking to FE, chairman and managing director K Paul Thomas says the aim of the bank in the first few years will be to continue to cater to its current customer segment and scale up gradually. Excerpts:
Though the deadline to start your banking operations is April 2017, have you set yourself any early target?
We have set ourselves a deadline of August 2016. As of now, we are progressing as per our plans and seem to be on target.
Tell us a bit about the challenges in your endeavour to become a bank from an MFI.
Challenges are many. One of the primary ones is on the human resources side because until now we had people who only dealt with one product. So, to overcome this challenge, we are aggressively getting on board senior-level bankers who are experienced in handling multiple products. Another major challenge is on the technology side as we believe it is something that will decide the success of the bank.
How big investment will you require to get these two areas covered?
Technology and other such infrastructure will roughly require about Rs50 crore of investment before we are ready to start.
Given the profile of your average customer, how big a challenge is it to get them to start parking their savings with you, because until now they considered you just a lender?
I don’t see this as a major challenge. We have been in this business for 20 years and many of our customers have been with us for a long time. In fact, around 40% of our customers have been doing business with us for at least five years. We have also been involved in developmental activities in the community. So, trust is not an issue at all.
Give us a sense of your current NPA situation. Are you taking any precautionary step(s) to keep them under control before you start operations as a bank?
Currently, gross NPAs are just 0.47% of our advances and since for the next four-five years we will continue to focus on the same customer segment, I don’t expect any deterioration in our asset quality. Even in the future, 70-75% of our asset will be in the small-ticket loan segment – an area that we understand.
Have you decided on a ceiling on the ticket size that you will lend as a bank?
The maximum that we will go up to is Rs 50 lakh and a majority of our loans will be below Rs 10 lakh. In any case, RBI regulations mandate 50% of our loans to be below Rs 50 lakh.
How soon after starting operations do you expect your cost of funds to reduce significantly? What kind of impact do you expect the ability to accept deposits to have on your margins?
As of now, we are dependent on high cost loans, which will now be grandfathered and it will take about three years to complete their repayment. Moreover, even though our cost of funding will reduce, the cost of raising those funds will rise. In fact, we expect raising deposits from our customers to cost us about 2-3%.