We will remain focused on informal business segments going forward: Equitas Small Finance Bank MD | Interview

With inflation being benign, interest rates are expected to be a bit soft in the short term and Equitas Small Finance Bank will be pro-actively managing interest rates on deposits to keep retail mobilisation strong, PN Vasudevan, MD & CEO, tells Shashank Nayar. Edited excerpts:

What are your plans given the bank’s listing due this year?

The bank shares are required to be listed as per RBI guidelines by September 2019 which is a work in progress. However, the business plan of the bank does not undergo any change due to this.

The bank witnessed a strong credit growth for the nine months this fiscal. Where do you see growth and demand coming from in the future?

The bank has a well-diversified loan portfolio with micro finance contributing around 25%, commercial vehicles 25%, small business loans of about 40% and MSE of about 10%. About 90% of the loan products of the bank addresses the credit needs of the tiny to small business people in the informal economy where the demand is very high as determined by various government surveys. But for a variety of historical reasons, the supply of bank credit to this segment remains low. So, we expect to remain focused on these informal business segments for quite a few years going forward. The bank has established its capability to assess credit and manage the risk arising out of funding such informal economy segments over the past several years and we should be capitalising on these strengths to pursue growth in the coming years.

Do you see the bank venturing into corporate lending in the future?

Not really. We would not have any natural advantage in this space and may have to be a small fifth banker to such customers which would not give any competitive advantage to us. We would prefer to remain focused on segments where we have a strong competitive advantage.

How do you plan to grow newly launched products such as gold and agri loans?

Agricultural loans have started off well and we see that growing in the coming years. As for gold loans, we are still at a very nascent stage and we would continue to watch the experience with this product for some more time before deciding to scale it up.

How is technology and digital banking altering your business? How do you plan to implement technology in rural areas?

Equitas Bank is fully digitised in terms of its service offerings for liability products. Today, about 94% of our banking transactions happen outside the bank branch with customers walking into the branches only for the balance 6% of the transactions. As for lending, in micro-finance, we are a fully paperless operations bank. Similar paperless operations are under progress in the rest of the loan product segments. We are also live on all the different payment apps. Customers can walk into our branches or our banking correspondents (BC) managed banking outlets and be able to transact either on their account held with Equitas Bank or with any other bank.

Do you see a change in the bank’s loan portfolio?

We are pretty well diversified as of now and we see the portfolio largely growing within our existing product lines. Products introduced over the last year or two would see some growth which may reduce the contribution of the older products but we do not plan to add any significant new product in the short term.

Where do you see the bank in the next few years?

The small finance bank model is fundamentally a strong model and if executed well, it can generate significant value for its customers as well as other stakeholders. When we leverage fully our investment in the 375 new liability branches and bring the cost of deposits as well as the cost of mobilising these deposits (the landed cost of funds) down over the next 2-3 years, we would begin to see the real impact of having converted into a bank. The steady state model would be that our cost of funds would be significantly lower than the best rated NBFCs, while on the lending side our focus would remain on areas underserved by the banks. Thus, this model enables the small finance banks to have the best of both worlds which puts it in a unique position in the financial services market.

What are your expectations on interest rate levels in the future?

With inflation being benign, the interest rates are expected to be a bit soft in the short term. However, the overall banking industry has growth in terms of lending at about 10-12% over the last two quarters whereas the deposits have grown only by 5-6%. This fundamentally means that banks have been unlocking their excess investment books and funding advances growth over the past few quarters. But with excess liquidity being used up in advances, shortly the banks are going to be looking to seriously get back to the deposits markets to raise money for funding advances. This might put some pressure on interest rates and at Equitas, we would be pro-actively managing our interest rates on deposits to keep our retail mobilisation strong.