Ujjivan Small Finance Bank (SFB) is eligible for a universal bank status, as per the conditions recently laid down by the Reserve Bank of India (RBI). The bank has reported net profit for the previous two financial years and has gross and net non-performing asset (NPA) ratios below 3% and 1%, respectively.
In an interview with Manju AB, Ujjivan SFB managing director and CEO Ittira Davis says the board will consider the time frame for transitioning to a universal bank in the current financial year. Ahead of the transition, the bank is working on having a more balanced asset portfolio with the aim of bringing down unsecured loans from 70% to 60%.
Davis talks about how the bank turned around from a loss of Rs 400 crore during the pandemic, the drive for a national footprint and the need to beef up low-cost CASA (current account savings account) deposits. He also throws light on the challenges small finance banks face as they evolve from their microfinance business.
“Our objective is to become a mass market bank to serve the un-served and the under-served,” he sums up.
Here are the edited excerpts from the conversation.
RBI has recently issued conditions for voluntary transition of small finance banks (SFBs) to a universal bank. Does Ujjivan SFB meet the eligibility criteria and when do you plan to upgrade to a universal bank?
As per the criteria laid out by the RBI, we are eligible. We have just completed the reverse merger (of holding company Ujjivan Financial Services with Ujjivan SFB). So, we need to consider the decision of transition to a universal bank carefully. The board will consider the time frame for such a conversion in the current financial year.
Do you think the time is not right to move to a universal bank as the unsecured loan portfolio is as high as 70%? Will you wait till the loan book is more balanced?
Our long-term strategy is to diversify the loan book and we are on course to achieving it. We will continue to introduce new products based on the demand from the customers. As we progress towards improving the secured portion in our total book, we also look to grow our high-yielding asset products much faster. This will help us contain our shift in yields.
Additionally, we are also working to have a more balanced portfolio with 60% of loans in the unsecured category and 40% in the secured segment.
Ujjivan has entered into two southern states during the last one year. Is the aim to have a more rounded national footprint before becoming a universal bank?
Ujjivan already has an extensive geographical presence with its bank branches situated in 26 states spanning across 326 districts. East has the highest concentration of branches at 30% followed by South at 29%, while North and west regions have 26% and 15% of branches, respectively. In FY23-24, we opened three new branches in Andhra Pradesh. These branches will primarily focus on building a deposit base.
What will be the major gains on the liability and asset side for Ujjivan once it becomes a universal bank?
We will benefit in the form of lower capital ratio requirement, reduction in priority sector lending requirement (75% in case of SFBs and 40% for universal banks), and removal of the existing requirement that >50% of the loan portfolio should consist of small-ticket loans (≤Rs2.5 mn). This will help us tap into higher ticket size secured portfolio.
Does AU SFB’s acquisition of Fincare SFB put any pressure on you to do such deals?
I wouldn’t like to respond to this.
Do you have any plans to grow inorganically?
We are focussed on growing our secured loan portfolio. While we will try to do it organically, we are also open to inorganic growth, if available at attractive valuations.
Any explorations or progress made?
We continue to explore all possible avenues. We will update you of any meaningful developments when they happen.
How much has moving from microfinance to a small finance bank helped?
Our objective is to become a mass market bank to serve the un-served and the under-served, by offering relevant banking solutions. As aspirations increase, the need for capital increases and Ujjivan SFB is best suited to offer them a range of products. Also, savings acquires importance. Becoming a bank helped us garner deposits and offer liability products from retail customers. Our fixed deposit and savings account carry one of the best interest rates, which helps our customers grow their monies.
The challenge small finance banks face after evolving from microfinance business is bringing the elevated unsecured loan component down. How are you addressing this issue?
Our loan book is 70% unsecured, primarily through micro banking. The balance 30% constitute affordable housing (17%), MSME (5%), financial institutions group (6%), and gold and vehicle loans, together at 3%. We are consciously working to increase our secured loan portfolio to 40%. Growth in affordable housing, vehicle finance and gold loans will help. We have also revamped the micro and small enterprises portfolio.
You understand the unsecured business well. But have you kept aside additional capital buffers for it?
In terms of the unsecured book, we have kept aside additional capital. Our board has placed the capital buffer requirement at 20%, which is higher than the regulatory mandate of 15%. We are currently at around 24%. Our non-performing assets (NPAs) from the unsecured business is around 2% (lower than industry) as compared to secured. Unsecured loans may sound risky, but not so if well managed. Our gross and net NPA ratios were 2.1% and 0.3%, respectively, for the year ended March 2024. For the previous year, these were at 2.6% and O.4%, respectively.
How did the bank turnaround from a loss of Rs 400 crore during the pandemic to a net profit of Rs 1,281 crore in 2022-23?
When covid struck India, we had to set provisions for customers who could not pay up. Post-covid, the economy picked up and customers started getting their businesses in order. We focussed on three things which were implemented through the 100-day plan as part of our turnaround strategy: building business volumes; improving asset quality by focussing on collections; and stabilising the team. The combination of all three led to improvement in business and profitability.Over the last two years, we have seen strong growth in business and healthy collections, resulting in a strong bottom-line performance. We posted a profit of Rs 1,100 crore in FY23 and Rs 1,281 crore in FY24. We continue to progress along the same lines.
What are the other challenges?
On the asset side, we see rising competition, credit quality issues and rising pressure on margins. Potential new entrants such as large players and fintechs are targeting ‘aspiring middle-class’ through digital products and services. Elevated inflation impacts household savings, leading to pressure on repayment capacity of borrowers.
On the liability side, the high interest rates has kept the cost of funds high for the banks. Acquiring right talent has become another challenge due to limited availability of resources in the fast-growing BFSI sector. High attrition is also impacting timely filling-up of new positions as well as replacement hiring. This in turn has impacted productivity and delay in key projects.
You have had a good run this year with net interest margins (NIMs) at 9.1% and the forecast is that you will manage to keep it above 8% for the current financial year. Is this sustainable?
In FY24, our cost of funds was at 7.4%. We expect this to stay in the similar range for the rest of the fiscal.
Our average yield is at 19.2% for Q4FY24. In our home loan and MSME book, the average yields are in the range of 12-13%. In the microfinance business, the yields are higher at 22%. Further, we are also focussed on growing high-yielding secured books like vehicle finance and micro lap, which are having yields in the range of 19-20%. Having said that, we expect NIMs to stay at 9% in FY25.
Attrition is a big problem all banks are grappling with. What has been your experience?
Attrition rates have gone up after covid-19. For us, it is at 28% while for some banks it is at 35%. We have a head count of 22,556 employees as on March 2024.
Banks are seeing a contraction in CASA due to the high-interest rate regime. How bad has it been for Ujjivan SFB?
Our CASA ratio has witnessed strong improvements, with the quarter ended March 2024 being at 26.5%. Going ahead, we would like to see this ratio climb to 30% in the next two years.
Our focus towards improving our retail deposits and offering value-added products like Maxima Current Account & Savings Account (CASA) has improved customer balances, along with onboarding new customers. Additionally, we have introduced Digital Fixed Deposits & Savings Account, which has seen healthy traction. We have also introduced RM module, which has helped increase our average balances.
RBI has expressed caution on the credit-to-deposit (CD) ratio of banks. What is your view?
Currently, our CD ratio is around 87%; it is the best among our peers. We continue to monitor the same and if required, will manage it by adjusting our on-balance sheet gross loan book.
Do you see great scope in growing the affordable housing loan segment?
In the secured loan segment, affordable housing prospects are brighter. We have revamped our sourcing model by introducing retail asset centres, to enable faster and better response to customer needs. The asset centers work on the hub and spoke model. We currently have 18 retail asset centers. We want to expand our market share from 17% to 20% plus, with growth predominantly coming in from Tier 2 and Tier 3 towns.
What is the progress on reverse merger and will it bring in any benefits besides diluting the promoter shareholding?
We have successfully completed the reverse merger between the bank and the holding company. We expect the new shares to be credited and it should start trading this week. Banks book value stands to gain post the merger, with current BVPS at Rs 29.06.
