SKS Microfinance, which did not receive the RBI’s in-principle approval for small finance banks (SFBs), believes it may take a long time for the SFBs to reduce their cost of funds despite having access to customer deposits. President of SKS Microfinance, S Dilli Raj tells Bhavik Nair in an interview that the company is confident of keeping its cost of funds down and is aiming to bring its lending rate to sub-20% in a few months. Excerpts:
Some of your peers who have received the in-principle approval for small finance banks can now see a reduction in their cost of funds considering that they will have access to deposits. How will you face the challenge of bringing your cost of funds down?
It takes seven to ten years to build up a reasonable CASA franchise. The segment that small finance banks would be dealing with is unlikely to provide time deposits. Some of the mightier banks that had come into existence had taken a long time to build deposits. So, it will be some time before any of the so called peers could take advantage of the deposits to bring down their cost of funds. SKS Microfinance has also got a good credit rating compared to the industry standards and that gives us a natural advantage when it comes to our cost of borrowing.
The risk premium on our borrowing has also seen a downward adjustment of 3.8% in the last one year. Also, 68% of our liability contracts are floating rate arrangements and we will gain from this reduction in interest rates. We already have an advantage when it comes to cost of funding. Our average cost of funding as of last quarter is 11.8%, which is also the lowest in the industry.
Would you be considering to go for the on-tap licensing for SFBs if in case the RBI comes out with the notification?
We will have to wait and watch the guidelines that the RBI may come out with in this regard. Only post reviewing that, we can take a call on this front.
What about your political risks? Do you see them persisting?
There are primarily three concerns when it comes to micro-lending: interest rates, over-leveraging of borrowers and recovery practices. As we speak today, every single aspect of our lending practice is regulated by the RBI. Once these larger concerns are assuaged, the regulatory risks are absolutely nil or negligible. This will automatically mitigate the political risks if you take into consideration what had led to the crisis in Andhra Pradesh a few years back where voids in the regulation concerning lending practices had eventually led to political interference. So, the absence of regulatory risks will mitigate political risks. Second argument is interest rates. There seems to be some co-relation between interest rates and the noise level related to political risks. Now, when you are seeing the interest rates come down so much, it automatically brings down the political risks.
What would be your projected asset under management (AUM) and lending rates going ahead?
As a strategy, we should be at sub-20% lending rates in the next 18 months and an asset under management of about Rs 9,000 crore. By end of FY16, the AUM should be somewhere around R6,000 crore. The central target, however, is to bring down the lending rates to sub-20%.
What are your expansion plans?
As of now we have 3.6 million borrowers, 4.4 million members and we have physical presence in 1,00,000 villages with 5,500 employees or Sangam managers taking care of the field work. We are planning a 25-30% increase in the number of these employees and expect the number of borrowers to touch six million within the next 18 months, considering that we are aiming a 50% increase in our AUMs. We are not majorly concentrating on geographical expansion or branch expansion too much as of now. Primarily the expansion will be through the enhancement of the job family of the field officers called Sangam managers who are our growth drivers.