Satin Creditcare Network is doubling down its focus on microfinance lending even as banks and small finance banks remain cautious despite early signs of easing stress. Chairman & MD HP Singh tells Narayanan V about the MFI’s credit growth, lender’s branch expansion, fundraising plans, and the strategy to grow its non-MFI book. Excerpts:
How do you see the stress situation in the MFI sector?
I think the peak of headwinds for the microfinance industry passed in the second half of the previous fiscal. Everyone is now starting from a much better base. With microfinance institutions network’s (MFIN) Guardrails 2.0 in place, lenders have been able to better understand the dynamics of where those headwinds usually emanate from. There may still be some talk about over-leveraging, but looking at the overall industry, I believe the worst is behind us. That said, we still need to be cautious about how we approach growth from here. The Reserve Bank of India (RBI) reducing the qualifying asset requirement for NBFC-MFIs from 75% to 60% is also a huge positive for the industry. It gives us more headroom to extend non-qualifying (non-MFI) loans as well.
How has Guardrails 2.0 worked in your case?
I think everyone who implemented Guardrails 2.0 has seen an increase in rejection rates for borrowers. In our case, the loan rejection rate was around 65–68% earlier, and it has gone up by another 3–4%. Some of our existing borrowers technically cannot take on more loans because of Guardrails 2.0. But this also addresses the issue of over-indebtedness, since it filters out borrowers who are already over-leveraged. It’s good for the industry that even if someone is an existing customer, we are not lending further if repayment capacity is in doubt. It’s better not to extend more credit and risk defaults. So yes, Guardrails 2.0 has pushed up rejection rates, but I think it’s ultimately good for the sector.
You disbursed over Rs 2,000 crore in the first quarter. What’s the guidance for the full year?
We haven’t given any specific growth guidance. Last year, we grew by about 5–6%, and the only thing I can say is that we will beat last year’s growth. Many small finance banks (SFBs) and commercial banks pulled back from the microfinance sector because of stress, and we see this as an opportune time to step in. We are in the process of opening about 200 branches immediately to drive growth, and we already have another 200 branches in the blueprint.
By the end of this year, we expect to have opened around 400 branches across the country. That expansion will definitely translate into portfolio growth. Our strongholds are Uttar Pradesh, Bihar, West Bengal, and Madhya Pradesh, where growth has been healthy and we haven’t faced issues. Even within Uttar Pradesh, we have so far covered only half the state, so there is significant scope to expand further. We will continue to strengthen our presence in these core states. On the other hand, we don’t plan to focus in a big way on the southern states, as other players are stronger in those markets. In fact, we have reduced our portfolio in Karnataka due to the Money Lending Bill.
Has bank lending to MFIs eased after the rate cuts?
The response from Indian banks has been rather lukewarm. They were the first to run away whenever there was stress or headwinds in the sector, and that continues to be the case. That said, we are currently flush with funds. Around 60% of our funding still comes from banks, but we are now focusing more on diversifying our borrowing sources. We recently raised $100 million through external commercial borrowings (ECBs), with six banks from Sri Lanka participating in the issue. Markets such as Taiwan, Sri Lanka, West Asia, and Japan are opening up quite significantly. There is strong demand from overseas investors to put money into India’s financial inclusion market, particularly with MFI players.
What’s your strategy to increase non-MFI business?
We actually took that call about six to seven years ago. We already have an affordable housing finance subsidiary, Satin Housing Finance, and an MSME lending subsidiary, Satin Finserv, which operates with higher ticket sizes (Rs 1 lakh-Rs 10 crore) than typical MFI loans (of Rs 1 lakh). While some other lenders are now talking about expanding into gold loans or loans against property (LAP) after the RBI reduced the qualifying asset threshold for MFIs, our approach is slightly different. We believe our strength lies in microfinance.
Our two subsidiaries have their own CEOs, infrastructure, and employees dedicated to LAP or housing finance, while Satin Creditcare will remain focused purely on microfinance. That’s where we are best suited, and that’s also the reason we are opening 400 new branches. Having said that, our non-MFI book has steadily increased from about 8% to 14% of the overall portfolio in last five years. Our target is to take it to 25–30% in next four to five years.