With a business model focused on certain geographies, Fincare Small Finance Bank has not been affected by the pandemic. In an interview with Mithun Dasgupta, Managing Director and CEO Rajeev Yadav said the bank is looking to grow its loan portfolio by 35-40% on average over the next three to four years. Excerpts:
Do you feel the need to change your business model in any way or is the model robust?
I would say that basically our model is focused on underbanked and unbanked customers, rural areas as we call it and semi-urban markets. Thus, the geographic areas in which we operate are of the utmost importance. And environmental changes don’t really impact our basic functioning. The type of portfolio that we offer as a bank has evolved over time to cover more products – be it lending, savings or protection. But, it is an aggregate of our efforts as an organization. We will continue to learn as we move forward, but the fundamental framework of how we operate has not changed because of the pandemic.
What percentage of your branches are in unbanked areas?
While banking regulations require us to have 25% of our branches in unbanked rural centers, we have 30% of the branches there. We provide home services; customers do not have to visit our branches. In our microfinance activity, 95% of clients come from rural areas. In other secure businesses, we might have a reasonable ratio of 60:40 (semi-urban: rural). So we have a very rural concentration in a few segments.
Digitization is gaining ground. Since you operate in a specific geography, are you able to offer the digital option by borrowing or lending?
In fact, we’re a very, very digital bank and we’re taking full advantage of digital. But, there is a difference in the way we operate. Digital technology can be harnessed in two ways: either customers use smartphones and go digital, or there is an employee-driven model. In the latter case, an employee sits down with a rural customer and performs the transactions digitally, without any paperwork. Our employees help customers with the tablet app provided by the company. Thus, we opened nearly 100% of our savings accounts and disbursed 100% of loans digitally.
Your loans are mostly unsecured. Is this a concern?
Since the bank started as a microfinance company, 80% of its portfolio remains unsecured, in a microfinance format. This is a gradual transformation towards secured loans.
When do you foresee the right balance between secured and unsecured loans?
We are trying to increase the share of secured loans from 6% to 7% every year. Our unsecured portfolio is also enjoying a good growth rate. Unsecured loans are our core segment, through which we promote financial inclusion. We therefore need to grow faster to build our secure portfolio.
If we increase secured loans by 6-7% every year for another three or four years, we could strike the right balance between secured and unsecured loans.
Do you co-lend with fintech companies? Or is your book totally exclusive?
Yes, our book is exclusive. Small financial banks cannot do co-loans. As a grassroots company, we specialize in small loans in the villages. So we don’t need a third party for the last mile needs.
What products do you focus on in the secured loan segment?
We are currently focusing on three products: Gold Loan, Micro-Loan Against Property (LAP), and Affordable Home Loan. Micro-LAP loans to SMEs and affordable housing loans are very big markets. In addition, there are not enough players in these markets.
Given that the bank has a largely unsecured portfolio, how do you assign a risk weight to assess capital adequacy? How much do you grant against the loans?
The regulator has different rules for different products. Currently, our capital adequacy is in the range of 27-28% (of which almost 95% is at Level I), although the minimum requirement is only 15%. Capital adequacy is therefore not a problem. From a provisioning perspective, we are provisioning higher for unsecured loans. As a bank, we provide expedited provisioning. So I would say that the risk weight is not a vital variable for us. The important parameters are the provisioning policy and the corresponding capital available from the bank.
Given the capital you have, how quickly do you expect the loan portfolio to grow over the next three or four years?
Different scenarios are possible. You can theoretically run the bank for one or two years and bring the capital adequacy down to a level close to the regulatory requirement. But given that we have to meet the regulatory conditions on the listing, which is scheduled for September – and gives us the opportunity to raise capital – we plan to raise capital in this fiscal year, which will suffice for the next two or three years. Loan growth has slowed this year due to the pandemic. Assuming ups and downs in business, we can expect to increase our loan portfolio by 35-40% on average over the next three to four years.
Do you see any risks for businesses in the post-Covid era?
Covid-19 has obviously led to a certain degree of risk in the consumer wallets of all banks. With consumers of all kinds affected, sustaining cash flow is less certain than before. But we anticipated this. And given the bank’s good performance in the past, we have made additional provisions. In any case, we have sufficient profitability to handle the additional credit problems arising from Covid-19. As the company has returned to almost normal levels, both in terms of disbursement and collection efficiency, there is no additional risk, unless the situation materially changes on the Covid-19 front.
What is your fundraising efficiency in the microfinance segment? Is there a risk in geographical terms?
If we look at the overall efficiency of the collection, including the pre-Covid wallet, it is slightly less than 95%. We are among the top banks on this metric. The non-delinquent zero bucket collection efficiency figure is 99.5%. It is a key benchmark for normality. We don’t have any exposure to the northeast, especially Assam. So there is no such geographic risk.