Ujjivan Financial Services banks on housing, SME segments for coming years

MD and CEO Samit Ghosh explains the company’s road ahead in transforming into a small finance bank

SAMIT GHOSH

MD and CEO, Ujjivan Financial Services

Microfinance firm Ujjivan Financial Services has posted stellar Q1 numbers with profits doubling and income rising almost 50 per cent.

Speaking to BTVI, Ujjivan Financial Services Managing Director and CEO Samit Ghosh explains the company’s road ahead in transforming into a small finance bank. While group loans contribute about 87 per cent of the total business, individual loans, especially housing and SME, will contribute half of the loan book in the next five years, he said. Excerpts:

Your profits doubled in Q1, to ₹71 crore. The net income is up 77 per cent on a year-on-year basis. Can you take us through the key drivers in this quarter?

As far as the profits are concerned, the business is moving as per our plans and the momentum is there. We have had a reasonable growth in our business. However, on the cost side, there is a one-off impact — the funds we received from our IPO are still in this quarter, which helped us reduce the cost of funds. So that has very positively impacted our profit for this quarter.

Along with that, we have also been able to reduce our operating expenses. Our efficiency levels have also gone up. So those factors positively contributed to this quarter’s profit.

Your net interest margin has gone up almost 100 basis year-on-year. Do you see that tapering off going forward? Is it sustainable at 12.96 per cent? Will there be any moderations in the forthcoming quarter?

There will be slight moderation in a sense that it is also affected (has gone up) by the funds we received from the capital infusion. So there will be certain impact from that.

In terms of the asset quality, the gross NPAs are at 0.18 per cent and the net NPAs are at 0.08 per cent. Is this trend likely to continue or do you see some strain on asset quality going ahead?

No, in case of asset quality, we do not foresee a major problem at all. Whatever minor blips are there in some particular parts of the country, we are able to tackle it and resolve it. We do not see the asset quality as an issue. But what would impact our cost is that we are transforming into a small finance bank. A lot of cost — relating to the investments we are making in terms of technology, infrastructure and hiring additional people — will start impacting us the next quarter onwards.

So that will increase our cost, but that really relates not to the regular business, but to the transformation cost of becoming a small finance bank.

Is your operational expenditure likely to go up on the back of the transition?

Yes, it will.

Your provisions are quite moderate — ₹6 crore right now as against ₹8 crore in the previous quarter. Will more stringent provisions be required? How are you provisioning for NPAs right now? How will your provisioning requirements change as you align and transform towards a small finance bank?

In terms of credit provisioning, we already have a very conservative plan. So I do not see credit provision in itself having a major impact when we become a small finance bank because we are already aligned to the RBI requirements for a small finance bank.

Our operating expense ratio is down to about 7 per cent, which is extremely good. Our cost-to-income ratio during the transition period will definitely go up. And that’s what we plan when we start making investment in infrastructure.

What will be your average ticket-size for SME loans?

At present, group loans contribute about 87 per cent of our business while individual, education, housing and SME comprise the remaining 13 per cent. In five years, we expect almost an equal division between group and individual lendings. Largely, the growth will come from housing and micro SME business.

Ratan Tata, Nandan Nilekani and Vijay Kelkar team up for Avanti Finance to provide loans to poor

Ratan Tata, Vijay Kelkar and Nandan Nilekani have started a technology enabled financial inclusion vehicle, Avanti Finance, which will be focused on delivering affordable and timely credit to under-served and un-served segments in India. 

The aim is to leverage on the social sector presence of Tata Trusts and other like minded partners and the rapidly evolving India Stack (Jan Dhan - Aadhar - Mobile), UPI and payments bank ecosystem. Avanti would use this ecosystem and will innovate on product design in consonance with the indigenous needs, to deliver seamlessly for the end consumer, said the statement. 

According to the release, 'the promoters strongly believe that the institutional inequalities and information asymmetries are depriving the target customer segment of access to affordable credit'. The target customer segment over the last few years has displayed very low delinquency rates compared to any other customer segment, but still is charged the highest rate of interest. Avanti's primary objective is to make a difference in this sphere thereby enhancing the prosperity in these communities .. 

Ratan Tata, Chairman of Tata Trusts has been actively engaged in several initiatives of the Tata Trusts since his retirement. His endeavours in the last few years have been focussed on creating a sustainable model for interventions which have lasting impact on communities, especially the under-privileged and the deprived. 

Tata and Nilekani are bringing their investments from their respective philanthropic capital, and any gains will be reinvested in philanthropic causes. Avanti will apply for registration to the Reserve Bank of India in the coming days. 

The founding directors of Avanti are Ratan Tata, Dr. Vijay Kelkar, Nandan Nilekani and R Venkataramanan. A senior leadership team with experience Technology, Microfinance, Enterprise Risk Management, Credit Operations and Customer Service, Leadership and Strategy Consulting, Structured Finance and Investment Banking is in place. 

"Avanti will be a platform to impact the poor through credit at individual and community levels to create a lasting improvement in their livelihoods and standard of living, ushering prosperity. I am thankful to Dr. Kelkar and Nandan for agreeing to be part of this purpose driven initiative", said former chairman of Tata Trusts. 

Nandan Nilekani , co-founder of Infosys stated "I am humbled by Ratan's initiative and his inviting me to be a part of this venture. My participation in Avanti is more driven by social motivation rather than anything else - with a view to serve the underserved and unserved and make the Tata Trusts and other likeminded partners philanthropy more effective. Technology is an important differentiator and allows us to make a difference in many ways than one". 

Avanti will establish operations before the end of the financial year. 

Vijay Kelkar is currently the chairman of the National Institute of Public Finance and Policy (NIPFP), and India Development Foundation. R Venkataramanan is currently the Managing Trustee of Tata Trusts.

Suggestions on takeover of loan accounts: A.K. Roychoudhary (Director of Sun Capital Advisory Services & Ex Banker PNB)

The present guidelines issued by banks for takeover of account by another bank is causing lot of hardships to SME segment

SME client wants to shift his account from his present banker for various reasons as given below;

·         With the change in manager of the branch he suffers on account of rigidity in the approach of new manager on genuine issues. Now that the new manger is going to be here for next 3 years he wants to avoid wasting his time in visiting branch for every small or big issue.

·         For customers with large facility, with the change in set up at RO/CO/ZO he is again at the mercy of new Senior officers who are not very supportive- say his genuine request for enhancement in facilities is not agreed to by RO/CO/HO. his request for some ad hoc/concessions in charges/ reduction in interest etc are not considered.

There can be many other reasons also for shifting of the bank by the customer.

A number of present guidelines come in the way for shifting of these clients to a new bank. Due to lack of support, the customer suffers and in our opinion due to rigidity on the part of local branch manager or a new Regional Manager the account ultimately slips into NPA category.

I would therefore suggest as under to take care of genuine difficulty in takeover cases:

1.    That banks should be free to take accounts from other banks especially in respect of SME segment.

2.    Presently shifting of accounts from ex-banks where from either CMD or ED’s have come to new bank is not allowed. The above rule at best may be applied where the account is over Rs.100 Cr. 

3.    The power to take over account for SME segment be permitted by the Manager of the new bank, in whose power it falls. Presently next higher authority is required to give permission. 

4.    When a manager can sanction a fresh loan to any new customer who is yet to start business and whose track record is not known, it is not understood why higher officer has to permit the takeover case when party’s track record is already available by going through the conduct of account from his ex bank. 

5.    Presently the permission of higher ups is not required if the customer pays off his limits with ex-bank and waits for three months to take limit from new bank. Knowing the fact that banks take generally longer time to sanction limits, this stipulation (3 months period) should be reduced to ONE month.

RBI on Tuesday decided that from 1 April, fixed rate loans upto three years

RBI on Tuesday decided that from 1 April, fixed rate loans upto three years shall be priced with reference to MCLR (Marginal Cost of Funds based Lending Rate), whereas Fixed rate loans of tenor above three years will continue to be exempted from MCLR system.

Rating agency Moody’s said on 20 Dec’15 that the measures will reduce pressure on net interest margins (NIMs) of banks. However, ahead of RBI policy meet on 5 April, such measures in addition to expected Repo rate reduction would be positive for the industry as their cost of funding would go down.

Sun Capital
 (source: bit.ly/1MPoSke). 

Here’s why the pickup in India’s loan growth has few believers

Lenders seem to be benefiting mostly because a jump in short-term commercial paper rates is driving companies into their arms, say analysts.

Loans climbed 11.6%, the most since July 2014, in the year through 19 February, according to fortnightly data from RBI.

Mumbai: A rebound in loan growth to a 20-month high sounds like good news for Indian banks as they struggle to shake off the impact of a surge in bad debts. But a deeper dive into the reasons behind the revival shows it may be unsustainable.

Lenders seem to be benefiting mostly because a jump in short-term commercial paper rates is driving companies into their arms, according to Prabhudas Lilladher Ltd. A weakening Indian rupee is also making domestic borrowing more attractive, with local companies raising $2.5 billion via foreign-currency loans in 2016 in the slowest start to a year since 2012.

Any pickup in credit could help revive economic growth and improve performance at banks after profitability, as measured by return on assets, slumped to the lowest in at least a decade. With distressed assets at a 14-year high, lenders in Asia’s third-largest economy are under pressure from regulators to give priority to cleaning up balance sheets.

“A strong revival in credit growth is still some time away,” said Nitin Kumar, a Mumbai-based banking analyst at Prabhudas Lilladher. “One reason for recent improvement is substitution of offshore funds and money-market instruments with bank loans, while the other is some pickup in retail loan demand. We expect loan growth to stay at about 12% this year and the next.”

Loans climbed 11.6%, the most since July 2014, in the year through 19 February, according to fortnightly data from the Reserve Bank of India (RBI). That compares with a 20-year low of 8.88% in February last year.

Three-month commercial paper (CP) rates have surged 105 basis points this year to 8.8%, data compiled by Bloombergshow, as India’s capital markets regulator restricted the amount of money that mutual funds can invest in debt instruments such as commercial paper and corporate bonds.

The rupee has weakened 0.5% this year to 66.5050 a dollar in Asia’s worst performance, after completing a fifth straight annual decline in 2015. Morgan Stanley this month lowered its year-end estimate to 73 from 70, while predicting a fall to 69 by the end of this quarter. That’s weaker than the currency’s record low of 68.845 seen in August 2013.

Foreign-currency borrowings by Indian companies so far in 2016 have more than halved from the $6.38 billion seen in the same period last year, according to data compiled byBloomberg.

Nomura Holdings Inc. expects lending growth to stay around 11.5% this year, Sonal Varma, a Mumbai-based economist, said in a phone interview on Friday.

The pickup in loans “may also reflect increased working capital needs” of corporates, Varma and her colleague Neha Saraf wrote in a report earlier this month. “The upside in credit growth is limited. Hence, instead of cheering the uptick, we remain in a wait-and-see mode.” 

Sun Capital

Sell assets of guarantors if firms don't repay loans: Govt to banks

Gross NPAs of PSBs rose to Rs 3.61 lakh cr while that of private lenders were at Rs 39,859 cr at the end of Dec'15

In order to effectively deal with Vijay Mallya type loan default cases, government Friday directed public sector banks to immediately invoke personal guarantees of promoter directors and recover loans from them in case the companies fail to repay.

Issuing the directive to heads of PSBs, the Finance Ministry regretted they seldom recover loan from guarantors in case of loan default by companies.

"It has been observed that there are a less number of cases where action has been taken for recovery against guarantors for attachment of assets owned by them and sell the same for recovery of defaulted loan," it said while issuing the directive in consultation with the RBI.

The ministry further told banks that "it would be prudent to take steps against guarantors immediately when no sign of revival is visible".

Asking banks to approach Debt Recovery Tribunal (DRT), it said action against guarantors should be taken under SARFAESI Act, Indian Contract Act and relevant legislations.

Exit of beleaguered industrialist Mallya to London early this month created huge uproar in Parliament as well as outside. Various companies associated with him owe over Rs 9,000 crore to different banks.

Mallya and his group firms are being probed by several agencies including Enforcement Directorate.

Gross NPAs of PSBs rose to Rs 3.61 lakh crore while that of private lenders were at Rs 39,859 crore at the end of December 2015.

Gross NPA ratio, as percentage of advances, rose to 7.30% while for private banks, it stood at 2.36% as of December-end.

In the event of default in repayments or loan by the borrower company, all directors are liable to repay the guaranteed loan with interest as the liability or the guarantor is co-extensive with the principal debtor (borrower).

"Action can be taken against the guarantor without suing the principal debtor for recovery and even if the decreed amount is covered by mortgage decree," the ministry said.

As per the law, if a guarantor has given any pledge of share held by him, the steps should be taken to sell the pledged share, under the Indian Contract Act.

The directive said that if the guarantor has not created any security Internet over his property but owns property and other assets, the banks should move DRT for their attachment and sale.

The banks, it said, should also keep a watch on periodical statement of book-debts and receivables submitted by the borrower and take steps for attachment and recovery of such book-debts under SARFAESI.

Sun Capital