R. Baskar Babu, chief executive officer, Suryoday Small Finance Bank
In September 2016, the Reserve Bank of India gave in-principle approval to 10 applicants to set up small finance banks, of which seven have commenced operations. These banks are required to have 75% for priority sector lending and at least 50% of their portfolio from loans of amounts below Rs25 lakh. Suryoday Small Finance Bank, was a microfinance institution and will continue to focus on small business loans in its product offerings as a bank. In an interaction with Mint, R. Baskar Babu elaborated on his vision of how small finance banks can change the way banking is done in the country. Edited excerpts:
It has been more than 3 months since you started as a bank. How has the journey been?
We launched in January and are currently rolling out processes to go full-fledged. While we are rolling out to the public selectively, we are also waiting for various approvals. The banking platform will be ready soon. We have launched 11 branches as of now. We will be rolling out another 15 in the next 2-3 months. By June we should have 25 bank branches. We currently have around 8 lakh customers from the microfinance business and have mobilized around Rs25 crore deposits from our customer segment. We are doing it internally with our existing customers first and should be fully ready from 1 May. We have 220 microfinance institution (MFI) branches and we have started the exercise of converting them to bank branches. The first phase of conversion will probably start in the second quarter.
What retail products are you offering?
We are already doing microfinance, business-focussed loans which are not more than Rs50,000. Many of our microfinance customers have a capability of taking little bigger loans, probably for a longer tenure and do not want to borrow as a group. So we are introducing individual business loans and have also started graduating customers to that. We have started unsecured business loans and working capital loans for the grocery segment, all focusing on maximum annual income of no more than Rs10 lakh. We will straddle between Rs2 lakh and Rs10 lakh annual income, which is a huge market. We are also tapping into the adjunct segments for unsecured loans for businesses, affordable home loans, small loans against properties and then we can also do recurring deposits, savings accounts and more at the doorstep.
How is the experience of being a microfinance institution shaping up the bank?
What we are trying is: can we do what we did for microfinance, for banking services as well? If someone has to withdraw or deposit a small amount of money, can we be somewhere around, either through a banking correspondent or branch, with similar convenience as we are doing for our loan products? Our entire focus as of now is that our entire customer base gets similar or better banking experience than what you and I will get when we walk in to a bank branch.
How is a microfinance customer different from a regular universal bank customer?
Our customer base is no different than the middle-class customers, except that the transaction size is much smaller. And many of our customers happen to be women in the household, from the lower economic strata. So many times they do not have a mobile. In over 50% of the cases, they have one at home but not one dedicated to themselves. But the son, daughter or head of the household is digitally savvy. What we can attempt now is to take banking to the household level, and probably it will take us some more time to take it to the customer level.
There is major push towards digital from the government. What are your plans on this front?
Digital is two way, one is how it helps the organization and another is what makes the customer experience superior. We will quickly move towards going digital, to open an account and on-boarding of a customer. On the second part, the inflow has to be digital and then the outflow or spending has to be digital. That system will take time to evolve for our existing customer base. Of course, options like e-wallets have gained ground after demonetization but probably that customer segment has not yet started using it. But when it happens, it will happen in an accelerated manner.
What are some things that universal banks could not do, that small finance banks can?
Think of a customer who walks into my branch and wants to start a systematic investment plan (SIP) in a mutual fund for Rs1,000. If the same customer has to go to a large public or private sector bank, their cost structures do not permit them to service a Rs1,000 SIP. While they will still service it, the customer will not get the same experience that you or I will get when we walk in to a branch to start an SIP of Rs25,000. Another example is when transactions don’t go through, and you have to be stuck on a call for 20 minutes to talk to a customer service executive, and the problem does not get resolved for many days. One such experience is enough for our customers to keep away from digital (banking). When that happens, they want to reach somebody and they can reach a branch. My executives can respond to the customer, and in the very least they can tell the customer that the issue will be resolved in 10 days, and then follow the issue over those 10 days. Given the large cost structures and size of established banks, they are not able to reach out to or do not want to serve that customer segment. It costs them Rs60-70 per transaction, and it isn’t cost effective.
Probably why we are able to do it as they are already our customers and we already have a mechanism to reach out to them. So the cost of acquisition of customer is virtually zero. Had we been a greenfield small finance bank, the cost structure would not have permitted us as either.
How can an existing universal bank customer benefit from you?
One clear thing is that we are giving higher rates for deposits. It is also likely that they will get a better customer experience too. The third, which we still are working on, is how we can make our transaction platform—mobile or net banking—far simpler.
What are the third-party products that you will offer? Have you partnered with companies already?
We have already started working on our partnerships and are waiting for approval from the Insurance Regulatory and Development Authority of India (Irdai) for a corporate agency. What we will be looking at will be simplistic products, where a customer should not come back to us after 6 months and complain that we sold her a product that she didn’t require in the first place. We will take extreme care in selling products, which will probably start with term insurance. In mutual funds we will sell purely index-based funds, simple ones for small values. Banking is an area where people want to trust and more so for the customer segment that we cater to. Maybe we can have a philosophy of ‘buyer beware’ for the educated customers, but in our segment the customer has indirectly given the responsibility to the banker. As the burden of responsibility has been shifted, we have to think as if we are thinking for ourselves. Looking from a personal finance management point of view we have to behave like responsible decisionmakers on their behalf. The responsibility becomes more important than the payout.
For deposits you are offering rates that are higher than regular banks. Are the rates sustainable?
It is sustainable provided I keep the cost structures lean. But if I have similar baking cost structures like the universal banks, then probably it will not be sustainable. We also will have to look at what customer segment we want to operate in. If I want to operate in mid-corporate segment, every basis point in cost of funds does matter. But in our customer base, it is very likely that a customer who is saving is also a customer who is borrowing. And the non borrowing customers will be large ticket depositers.
When it becomes larger, then we will have to balance it on both the counts. One our yields on borrowing will come down. As these come down, our rate of deposits will also come down. So my current cost of funds is 12%. What I am doing is that I am replacing this 12% with 9%. We have a 700 crore borrowing so we are trying to replace it with 9%.
The highest rate that we are giving is in the 1-2 year deposit segment, so that is what we are targeting at the moment. At least for the next two years, we will be paying a premium on the existing market rates.
In the first phase we are just replacing our current borrowings with little lower cost deposits, which incidentally happens to be 100-125 bps more than the rate paid by the regular banks. Another fact is that we are currently in a market where banks are not really chasing deposits, certainly not term deposits. On that basis probably the other banks will take the pricing even lower, then probably we will correspondingly come down. But still the difference of 100-125 bps will stay on for at least two years.