At a time, when there is a race among the small finance banks (SFBs) to establish themselves as a universal bank, Suryoday Small Finance Bank's CEO Baskar Babu Ramachandran believes that there is no rush to be a universal bank as SFBs get fairly good customer exposure these days.
Almost a decade ago, several founders and promoters of small finance banks applied to the Reserve Bank of India (RBI) for a license to set up universal banks. However, barring two (one got merged with the biggest small finance bank and another got merged with a fintech), all managed to establish themselves only as a small finance bank. Their dreams got a boost recently when the RBI released the guidelines for voluntarily converting SFBs into universal banks. However, in the current situation, only two banks have met the eligibility criteria set by the RBI to become universal banks.
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In an exclusive interaction with Outlook Business, Baskar Babu Ramachandran, Co-Founder and CEO, of Suryoday Small Finance Bank talks about how the bank is not in a rush to become a universal bank and the plans going forward.
Edited excerpts from the interview
Do you think RBI has put an unrealistic criteria or unrealistic goal for the small finance bank to be a universal bank?
The criteria put across by RBI for conversion of small finance bank to universal bank is a mix of quantitative and qualitative parameters and is not at all unrealistic. Most of the small finance banks seem to be about a year away from qualifying, purely on quantitative norms. However, the qualitative norms are subjective, primarily requiring the entity to have a robust, diversified portfolio.
The majority of small finance banks transitioned from being an NBFC (Non-Banking Financial Companies) or NBFC MFI (Microfinance Institutions) to a small finance bank. This required reasonable change in the operating canvass as compared to the NBFC model. There are tremendous advantages of being a small finance bank as compared to operating as an NBFC in respect of the ability to mobilise deposits or garnering liabilities.
Along with the ease of deposit mobilisation comes the large responsibility since you are dealing with public funds directly. Therefore, the asset quality and portfolio diversification across asset class to manage the risk are the two benchmarks which each of the small finance banks continuously monitor and hence the RBI’s criteria are not at all unrealistic.
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Do you really think it is necessary to achieve the status of universal bank? What is the kind of challenges they usually face in terms of achieving the license of universal bank?
The regulations and supervisory requirements applicable to small finance banks and universal banks are the same.
So, conversion to a universal bank is not going to give any regulatory arbitrage to the entity. Yes, converting to a universal bank does allow banks to offer a wider range of products. At this point of time, we believe that one differentiation is obviously in the name i.e. from “Suryoday Small Finance Bank Limited”, you become “Suryoday Bank Limited”. Having said that, this nomenclature change is a limited differentiator and was a factor in the past as compared to the way the customer views small finance banks. Today, small finance banks are accepted in the ecosystem as regular banks. The only advantage is probably the reduced PSL (Priority Sector Lending) requirement.
This is a natural progression that small finance banks convert themselves to universal banks, and there maybe more institutions, in future, that will become small finance banks.
After massive success of UPI, the RBI has now pitched the idea of ULI. So how do you think a small finance bank can make changes in their existing infrastructure to get into ULI ?
This will take some time. But what this certainly does is that it gives a view of the customer beyond the credit bureau. Well, there isn't much in terms of any data except for credit bureau, and so it becomes extremely difficult to assess if the credit bureau track is not available. Having more data in the digital domain will help in meaningful assessments.
Additionally, the regulator is also looking at ULI on an overall basis. The banks should do everything possible to make it seamless and frictionless. However, they do not want the banks to fund each and everyone without any purpose, as this will lead to increased indebtedness, which will hurt the consumer and certainly, in parallel, the institution as well.
This will be a superb mechanism for ensuring that there is an underlying purpose overall. It will become almost like a UPI in the lending space.
The intent is whether all the data which is on account of payments made through UPI can be used meaningfully to give them an access to lending. Over a period of time, more than the access to lending, what this is likely to do is the convenience with which customers can borrow money and, more importantly, the convenience with which they can repay the money or even pre-close the loan.
Yes, it will have a massive kick-off. However, it will take time.
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At a time when people choose primarily equity over debt instrument, why do you plan to launch a 20-year fixed deposit (FD)? Do you think it will be profitable, or will people feel attracted towards it?
The product is still under development and has not been rolled out as yet. Mutual funds have developed a niche for themselves and are competing with the banks for the same savings/investment kitty by introducing various fixed income schemes. Banks can also innovate within the permissible regulatory frame work and do what is good for the customers.
The intent of this product is not to offer a 20-year FD, that as a product, the customer can purchase a 20years government security. While we are working on the final contours of the product, it would be a 10-12 year investment product post in which there would be a steady income to the customer for the next 10-12 years. We believe there are two use cases i.e., if the deposit is placed when the child starts going to school and in 11 years, the child will complete the higher secondary education and post the 12thstandard, there would be a steady stream of return, which will be used for paying the fees or part of the fees, depending on the savings.
The other aspect is that the product would provide certainty in the returns. Presently, the fixed deposit rates vary anywhere between 7 per cent in public sector banks and 9.5 per cent in small finance banks.
We are assessing the product in terms of the interest rate risks, given that the product would be offering a committed fixed deposit rate for the entire tenure. It will be more like a pilot program to begin with, considering the risks involved in such a long-term product. At a time when there is intense competition for deposits not just from banks but also from Mutual Funds and other alternate asset classes, which are targeting the same deposit base, it is necessary to innovate and offer a product, which would be providing reasonable returns to the customers.
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