The bank of small things

Suryoday Micro Finance, the sole holder of a small finance bank licence in the state, seeks to give loans to people like drivers, labourers

December 21, 2015 12:00 am | Updated March 24, 2016 11:11 am IST

R Baskar Babu says small finance is a long-term game—Photo: Yogesh Mhatre

R Baskar Babu says small finance is a long-term game—Photo: Yogesh Mhatre

f the 10 players who recently received an in-principle small finance bank (SFB) licence, Suryoday Micro Finance is the only entity from Maharashtra. From a cumulative disbursement of Rs 15 crore when it started operations in 2009, the institution has disbursed Rs 1,663 crore in 2015.

Manojit Saha traces its journey so far, and charts the road ahead.

India is home to 21 per cent of the world’s unbanked adults. Almost half the population has no access to formal credit, and serving the unbanked needs a different model and strategy. The financially excluded are not only in the rural interiors but also in the metropolitan cities.

R Baskar Babu, co-founder and CEO of Suryoday Micro Finance, recognised this as an opportunity in 2008. He left a corporate job to start Suryoday Micro Finance along with two colleagues. The institution started operations with five branches in Pune in May 2009.

Mr Babu, who started his career with the Cholamandalam Group and worked with HDFC Bank and GE Capital, saw an opportunity in serving autorickshaw drivers and migrant workers, to whom existing banks would not offer loans. In a world where individual credit score has become a prerequisite for getting a loan, no bank lends to a person who does not have a banking track record.

“This is a long-term game. If the business is a win-win proposition, then you can progress in a prudent manner. Profits may not come quickly, but they will follow,” Mr Babu said in an interaction with The Hindu at his Navi Mumbai office.

Operations have now been extended to several cities in Tamil Nadu, Odisha, Gujarat, Madhya Pradesh, Rajasthan and Karnataka, apart from Maharashtra. Suryoday also had operations in Andhra Pradesh but had to wind up in 2010 when the state government tightened norms.

Challenges

Banking in India is a highly regulated activity, with a high entry barrier. RBI – seen as a conservative regulator – issued fresh full service banking licences (universal bank licences) only in 2014, after a gap of over a decade. Governor Raghuram Rajan, who took charge in 2013, went a step ahead to offer licences for niche banking.

As a result, 21 new differentiated bank licences were awarded in one shot, this year. Altogether 11 players were given payment bank licences, whose main objective was to facilitate remittance services. Besides, 10 small finance bank licences were offered with the objective of providing finance to small borrowers.

Not only do SFBs have to follow the regulations that universal banks do, priority sector norms are a lot more stringent. They also have to deal with a cap on lending. RBI mandates the maximum loan size at 15 per cent of the SFB’s net worth. Further, at least 50 per cent of its loan portfolio should constitute loans and advances of up to Rs 25 lakh. Its operations are also subjected to stringent audit and inspection.

“We are still a one-product entity, but we have to launch multiple products. The compliance has to be far stricter. We need to have a full-fledged customer service and grievance department,” Mr Babu said. Suryoday has a service customer service department, but the difference is that its 6.4 lakh customers don’t call in. The micro lender makes the calls to 7,000-odd customers every month.

Treasury operations

Banks typically make hefty profits in treasury operations, taking advantage of the prevailing market conditions. Suryoday, however, is not looking at treasury operations for turning in profits as yet. “We have to build that infrastructure. Treasury is more of an operating centre from where we can meet the obligations of CRR and SLR,” Mr Babu said.

Meeting the mandate

The immediate priority for Suryoday is to have a structure to receive the final approval for commencing operations. The first of these is the domestic shareholding requirement. RBI has mandated that domestic promoters need to hold at least 51 per cent stake. Domestic investors currently have 32 per cent stake in Suryoday. International Finance Corporation, HDFC, Aavishkaar Goodwell, HDFC Life, among others, are its investors.

Promoters’ shareholding needs to be at 26 per cent. For Suryoday, four shareholders who are part of the promoter group, hold 23 per cent. Mr Babu said a fresh share issue will address these issues. “The NBFC-MFI will be converted into a small finance bank. So there is no holding company structure. We are confident we can complete the process in the next few months,” he added.

The company will also raise capital of Rs 100 crore before its starts operations as a bank which will take its net worth close to Rs 300 crore.

The strategy

The roadmap for the next three years has been chalked out. The focus initially will be to consolidate, migrating its existing MFI customers to bank and build a liabilities franchise. Suryoday’s loan book is at Rs 800 crore. In the initial years, Suryoday will focus on its existing customers with different products. “Maybe a little later, we will offer the products to new customers, who are probably not well catered to by other banks,” Mr Babu said.

The strategy is also to be a multi-product entity. The to-be bank also wants to offer small ticket home loans, but in the second or third year of operation. The average ticket size of Suryoday is Rs 12,500, which a traditional bank may not consider enough to lend.

“When ticket sizes are low, operational intricacies become larger. The customer wants doorstep service. The business model should support that,” he said.

The key, he added, is to understand the customer in depth and offer products that are simple, transparent and convenient.

Recovery of unpaid dues is another key area in banking, particularly at a time when the sector is experiencing a sharp rise in non-performing assets. But Suryoday has a strategy ready for this. “If there is a marginal delay in repayment, we should not make them feel like they are defaulters, like mainstream banking does. Making them feel comfortable is the key,” Mr Babu said.

Inspiring competitors

Suryoday Small Finance Bank is scheduled to kick off operations on August 25, 2016 with 25 branches, and aims for 100 in a year. Asked if Suryoday sees itself as a universal bank 10 years down the line, Mr Babu said, “I don’t think we are starting with that as a focus. We can offer all the products the customers want. They don’t need sophisticated foreign exchange products or a derivative product. Our focus is to create a well-run, large small finance bank. The aim is not to become a universal bank.”

We are still a one-product entity, but we have to launch multiple productsR Baskar BabuCEO, Suryoday Micro Finance

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