Best of New Breed Banks

At a time when any reference to Indian banking conjures up images of spiralling non-performing assets (NPAs) that most large players have been grappling with for years, the new-breed Utkarsh Small Finance Bank (Utkarsh SFB) has been able to maintain top-notch asset quality. This is one reason it has emerged as the Best Bank in the Small Finance Bank (SFB) category, introduced for the first time.

Despite being sixth in capital adequacy, fourth in growth and fifth in size in its category, Utkarsh SFB was at the top of the heap in Quality of Assets, measured by 10 sub-parameters, in the quantitative study for FY20. In Quality of Earnings, it got the second rank, while in productivity and efficiency, it was third among SFBs.

The seeds for high asset quality were sown right at the inception of Utkarsh as a microfinance (MFI) lender in 2009, the bank's earlier avatar. "The focus was fixed on two things, excellent quality of assets and no compromise on risk and process controls, which are meticulously followed even today," says Govind Singh, Managing Director & CEO of Utkarsh Small Finance Bank Ltd, who has been in banking for over three decades.

Asset Quality

Eleven years back, Utkarsh, then an MFI, decided not to give any incentive for ticket size or collections. The aim was to take care of the process of sourcing a customer. "The moment you give an incentive for ticket size, people will increase the amount of loan sought. It is important how you source the customer, not what you do after the sourcing. We ensure that the process is always supreme," says Singh.

Unlike established banks, Utkarsh meets its customers on a fortnightly basis to understand their needs and get early warning signals of stress. "In the 11-year history, barring exceptional events like demonetisation then or Covid-19 now, I think the quality of our portfolio has always been one of the best in the industry," says Singh.

This, along with control over operational expenditure, has stood Utkarsh Bank in good stead in 'quality of earnings' too, where it has got the second rank. "Despite having several other expenses as a nascent bank, we kept focus on controlling operational expenditure and sustainability of operations, by personally tracking the profitability of each unit and branch," says Singh, who was Business Head for Micro Banking with ICICI Bank prior to setting up Utkarsh.

Covid-19 Pangs

The pandemic and the resulting lockdown could have unsettled Utkarsh, which depended on face-to-face contact, JLG (Joint Loan Group) loans and regular customer connect but for an alert management. "It anticipated the lockdown and galvanised the entire machinery, and improved bank credit and bank deposit business in a big way, so that all channels can be up and running. Customer connect was kept alive through online and other channels," says Singh. Utkarsh was initially protected from the severity of the pandemic as most of its customers are in rural and semi-urban areas, which were hit less than metros and large cities.

"Because a lot of people had lost their jobs, stress was seen all across. In fact, our collections came down significantly, especially in May, June and July. However, of late, we have been seeing good traction as collections have improved up to 90 per cent. Even new disbursements are picking up," he adds. "In the last two months, in fact, disbursements have been higher than in the pre-pandemic period. So, we are opening new branches and hiring people. I think the gloom we saw in April and May is no more there and everyone is looking optimistic about things coming back on track," he says.

New Products

When Utkarsh received the final RBI licence to start full-fledged banking operations in 2016-17, it had a large microfinance book. It immediately started working on the other verticals. "All of them were part of financial inclusion, whether we talk about SME or affordable housing or two-wheeler loans or personal loans at a lower end," says Singh. The SFB is also focusing on commercial vehicle and construction equipment loans.

At least two verticals - MSME and housing - together have grown to Rs 650-700 crore. Since the base is still low, 40-50 per cent CAGR for the next three to four years is possible. In the coming years, the bank plans to enter the hardcore agriculture loans segment in a big way, including tractor loans, from just allied services like animal husbandry at present. We expect the non-JLG book to be in the range of 35-40 per cent in the next three-four years."

Opportunity Beckons

On high growth rate in assets and liabilities posted by the top three SFBs and the growth opportunity that beckons them, Singh is confident that these banks, with low base and balance sheet sizes, would not find it difficult to maintain a growth rate of 30-40 per cent for the next three-four years, while refusing to hazard a guess on the longevity of such fast growth. This is because SFBs are operating in Tier-III and Tier-IV towns, which are not the focus for the bigger banks. "But once the balance sheets of all these SFBs grow by, say, three times of what they are today, the pace of growth will certainly taper to may be 20s, though it will never come down to 10-12 per cent in four-five years," says Singh.

Cost-Income Ratio

When SFBs were granted licences, everybody thought they will enjoy advantages over large banks such as new technology, lack of legacy issues and small branch infrastructure. However, they are saddled with high cost-to-income ratio, as high as 55-80 in some cases, after three-four years of operations. This may exert pressure on net interest margins (NIMs).

Singh says the cost-to-income ratio for an average SFB is around 60 and it will be long before they reach the 40-45 number for large/established banks, mainly due to low ticket size of loans that SFBs give. "That won't to possible at least for the next three to five years," says Singh. The average ticket size at Utkarsh is as low as Rs 30,000.

Singh gives two reasons for SFBs' high cost-to-income ratio. One is the initial cost of setting up a bank and building new IT infrastructure. Second is upgrade of departments like risk and compliance. Singh says NIMs of SFBs, above 10 per cent in some cases, will settle at 8-8.5 per cent.

Looking Ahead

Utkarsh Bank is planning to hit the market with an Initial Public Offering(IPO). On possible listing relaxations for SFBs, he says, "We understand from RBI that they want us to meet existing guidelines as far as the IPO timeline is concerned."

Responding to a query, he says, "We are open to inorganic growth opportunities. However, it is important that it should fit in terms of product basket, geography, overall DNA and governance, to avoid complications later." He also exudes confidence on the economic front. "People are going back to their livelihood, but still some segments of society are facing challenges, and we have to deal with that."

(The writer is a Mumbai-based journalist)