For a bank which serves the middle-end to bottom-end of India, Covid-19 hit hard. Jana Small Finance Bank’s gross non-performing assets (NPAs) surged to 7.2% in FY21 from 3.2% a year ago and the public float plan in 2021 had to be deferred.
In an interview with Manju AB, Jana Small Finance Bank managing director and CEO Ajay Kanwal talks about the turnaround strategy, the approach towards secured lending, the IPO journey and the lender’s distinct positioning of meeting the requirements of middle-end India.
Here are the edited excerpts from the conversation.
Shares of Jana Small Finance Bank listed at a discount of 4% to the IPO issue price of Rs 414 but has since bounced back. What gives you the confidence that large investors like TPG and Morgan Stanley will hold on to the stock after the IPO?
Our large shareholders have been very supportive through difficult times. I am sure they will be watching the success and growth of the bank and then take their decision.
What strategic calls are you taking now that you have raised capital through the IPO?
The proceeds from the IPO will be used to augment Tier-1 capital and support growth.
The focus is to do more of what we do and expand our depth of relationships with customers.
What is the distinct positioning of Jana Small Finance Bank compared to its peer groups?
We have positioned ourselves to serve the broad middle-end segment of bank customers in India. In the past, the cost to serve this segment was very high considering the small ticket size the business involved. Now with digitisation, there is no issue on cost. We are majorly digitised and there is hardly any process that requires paper.
A critical area which needed correction was bad loans. How did you manage to bring gross NPAs down from 7.2% in FY21 to 2.4% and net NPA to 0.9% in September 2023?
Covid happened and when you are serving the middle-end to bottom-end of India, you are bound to get impacted. Pre-Covid, our net NPA ratio was 1.4% and gross NPA was 3.2% (FY2020). We obviously had a bad patch during Covid but made all the provisions and yet were profitable each year.
We also changed our strategy towards secured lending since we launched the bank in 2018. When we entered Covid, our secured lending portfolio was at 42.9% in FY21. This has gone up to 57.4 % of our total loan book as of September 2023. Our secured assets include mortgages, LAP, two-wheelers and gold loans.
Aren’t there gaps in your loan product offerings?
We have some gaps in our loan portfolio. We do not have car loans in our asset product list. Used vehicle loans is also not there.
Our next product range would be used vehicles financing, including two-wheelers, cars and commercial vehicles.
You can come to us as a customer through any route – home loans, vehicle financing, MSME (micro, small and medium enterprises) funding. We will meet your other financing needs as well so that we become a one-stop destination. If there is a requirement for supply chain management, we will do that.
Isn’t used vehicle financing risky?
Our model of launching a new product will typically be a cross-sell to existing customers. We want to be a primary bank to them. As we see demand in used vehicle financing, we are working towards not just two-wheelers in that space but also used cars. We would prefer to give it to our microfinance customers where we provide unsecured loans up to Rs 50,000 as here we are certain about the end use. The repayment is of impeccable standard and delinquencies are negligible.
Now you offer a home loan even up to Rs 3 crore?
Yes, we are giving high-value home loans as well. But a majority of our home loans are in the affordable housing segment. The average ticket size is Rs 12.6 lakh.
For our home loan customers, we offer them 100% financing for two-wheelers against our normal product offering of 90%. Since we know these customers, we offer them a lower rate than what is available in the market and fully fund their purchase.
Good customers are those who put their second loan product with the bank. There is no customer acquisition cost. The bank also has the customer’s savings account and credit bureau records.
We are building a bank that meets the requirements of middle-end India. Earlier, they used to get vehicle, gold and housing loans from different places. Here we know them as customers for everything.
On the MSME side, what is the largest loan you have given?
For one of our manufacturing customers, we have provided a credit exposure of Rs 250 crore. This is the largest single loan that we have given. Our next highest loan to a borrower is Rs 100 crore. For gold loans, our average ticket size is Rs 44,000.
We don’t give large loans which are very price sensitive. We are not there yet. Besides, there is so much of opportunity for the middle of India.
How secure are gold loans?
Gold loans are secure in nature. But if it is stolen gold, then the police investigation starts and based on that, it is taken away. There is no way the bank can know if someone has come with stolen gold or it is the borrower’s personal assets. That is one small risk the lender takes in gold loans. The other is ascertaining the quality of gold.
Are NPAs still worrisome?
A small number of delinquencies is common. People fall ill, some lose their jobs. Only a small portion of borrowers are wilful defaulters.
About three-fourth of our gross NPA book is backed by security. But to recover loans under the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, we will have to follow a process which takes about 12.months. After 90 days, it goes into NPA if the principal or the interest remains unpaid. But in the run up to the 12 months under SARFAESI, borrowers generally come for a settlement and repay.
Are you satisfied with the way the bank is growing or you want it to be faster?
We have an AUM (assets under management) of Rs 23,030 crore and deposit base of Rs 18,937 crore. While the growth rate for deposits is 33.6% year-on-year, AUM assets is growing at 35% YoY.
Is the availability of funds keeping your credit-to-deposit (CD) ratio high at 109% as in FY23?
We are working towards reducing our CD ratio. Since we take refinance from Nabard for agri, Sidbi for MSME and NHB for housing loans, if we bring down our CD ratio quickly we will have large liquidity surplus situation. It makes a lot of economic sense for us to borrow from these three agencies as the cost of funds become cheaper - just about 7% to 8% for long-term money of 8-10 years. For us, raising money is not a big issue and CD ratio will see continuous improvement.
What about your branch expansion plans?
We are a national franchise, having 771 branches and 49 lakh customers spread across 24 states and union territories. As we don’t have geography concentration, it is very easy for us to grow.
Since we are already wide spread, our bias is to open new branches and majorly focus on relocating to better locations.
About 36% of our branches are in the unbanked rural centres. This is higher than the Reserve Bank of India’s (RBI) mandate of having at least 25% of branches in the rural centres.
Originally, Jana was an urban microfinance institution and our endeavour was to convert it into a rural lending institution. We took our microfinance rural. We thought rural micro finance would be a better business model for us than an urban one. This is why we have a larger proportion of unbanked rural centres in our branch network mix.
So lending is more from rural areas while deposits are coming from urban centres?
The bank is divided like this. Our deposits are mainly from urban areas while lending is in semi-urban and rural pockets.
Is the attrition rate high in the bank?
It is in the mid-20s range. For employees in the microfinance field, there is a lot of burnout due to the collection effect.
The average age of our employees is around 30 years. During the first two years, we give ESOPS to every single employee so that they feel like owners. Then we have flexi timings. We open our branches early by 8.15 am to beat Bengaluru traffic and by 5.30 pm our offices are all empty.
What is the best thing you like about Jana Small Finance Bank?
We have a concept of open office and there are no cabins even for the top officials. I sit on a computer next to my secretary. This helps in transparency. I believe that I should not be taking away any bit of floor space for things I do not need.
I was with Citi and Standard Chartered Bank before I joined Jana. The best thing about Jana is that you can do innovative things and quickly too, just like a startup. If I suggested to do away with cabins, there would have been a mini riot elsewhere.
Everything is made simpler at Jana Small Finance Bank as we are addressing the needs of the mass market and have no legacy systems.
