Equitas Small Finance Bank fell just short of meeting the asset quality requirements for a universal bank license. In an interview with FE, Managing Director and CEO PN Vasudevan discusses, among other topics, why it is important for Equitas to move beyond its’small finance bank designation. Here are some highlights:
Credit-deposit mismatch is a major concern for large commercial banks. How is this playing out for SFBs?
Despite some confusion surrounding the ‘ small finance bank’ label, we have successfully raised public deposits. People frequently question whether we are a finance company or a true bank and whether their investments are secure, even after seven to eight years of the SFB model. Despite these concerns, we have not faced any difficulties in attracting deposits. Our ability to raise funds has never been limited, as we offer interest rates that are 1-2% higher than those of larger banks.
How have SFBs evolved on the credit side?
A significant trend in the industry is portfolio diversification. When SFB licenses were issued seven to eight years ago, most of us were primarily NBFC microfinance institutions, with 50–90% of our exposure to unsecured microfinance. Transitioning to banks, a crucial change was to increase our secured loan portfolio and reduce unsecured loans to a more balanced level. While the RBI does not specify a required portfolio mix, it is important to maintain a balanced approach to unsecured loans.
Regarding Equitas’ loan book mix:
Our portfolio is well-diversified. Currently, 83% of our loans are secured, and 17% are unsecured (primarily microfinance). Within the secured loans, 38% are small business loans, 25% are commercial vehicle loans, 12% are affordable housing loans, and the remaining 7-8% are allocated to MSMEs and lending to NBFCs. We introduced credit cards in the fourth quarter and are also rolling out personal loans, both of which fall into the unsecured category.
Why did you decide to offer credit cards and personal loans?
Lending to the informal sector generally includes small business loans (SBLs), affordable housing finance, and consumption loans. Government surveys reveal an unmet credit demand of approximately₹25 lakh crore for SBLs and₹10 lakh crore for affordable housing. Many informal sector customers are ineligible for credit cards from other banks due to their profiles. However, there is substantial potential to meet their financing needs, such as for home appliances, travel, and medical expenses. The estimated unmet demand for consumption loans in the informal economy is ₹15-20 lakh crore, presenting a significant market opportunity.
Isn’t increasing the proportion of unsecured loans risky?
For the first two years of a personal loan, we will focus on the salaried market and current bank clients. The target market for credit cards will mostly be current clients. For instance, if I have given a customer an affordable housing loan of₹10 lakh through SBL, I can also give them a credit card with a limit of₹80,000 to Rs 1 lakh. This is possible since a ₹15 lakh property serves as security for the loan. The secured asset reduces risk even if my loan-to-value ratio might go up.
Our goal is to have less than 20% of our overall loan book comprised of unsecured loans, which includes credit cards, microloans, and personal loans.
What additional products are you working on?
We got our AD Cat 1 license when the RBI granted SFBs permission to become Authorized Dealer Category 1 (AD Cat 1) banks a year ago. Because of this, we are able to provide SMEs with trade financing products like import/export credit, packing credit, trade credit, and FCNR (B) deposits, much like universal banks do.
We want to start FCNR (B) deposits in the third quarter, remittances in the fourth, and trade finance products early in the following year, considering our current NRI clientele.
What is the status of your universal bank ambitions?
We almost missed the RBI’s requirements for SFBs to convert to universal banks since our net non-performing assets (NNPA) ratio was 1.1% as opposed to the necessary less than 1% for the two years prior. We increased our provisions in the June quarter in order to get it down to less than 1%. Through FY24–25 and FY25–26, we must maintain this ratio, and we will reapply as soon as we are qualified to do so under the new guidelines.
What are the advantages of transitioning to a universal bank?
Currently, priority sector lending regulations apply to 80–85% of our loans. If we continue to retain 80% of PSL loans while becoming a universal bank, we can sell the surplus to other banks that fall short of PSL standards and make money through fees. Eliminating the term “small finance bank” will also help increase deposits and enhance public perception.
While universal banks only need a 9% capital adequacy ratio, SFBs must have one of fifteen percent. Our 4% capital buffer will still be available for use, even though universal banks are required to keep one in order to handle operational and liquidity risks.