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?
Not at all. Actually, most of us will be just a year away, purely in terms of the quantitative norms. But the quantitative norms, what they are saying is, what anyway all of us currently are pursuing, that is having a robust diversified portfolio.
Majority of us moved from NBFC (Non-Banking Financial Company), NBFC MFI (Micro finance Institutions) to a bank. So that transitioning can't continue to operate like an NBFC when you are already a bank. You have got tremendous advantages for deposit mobilisation or reaching out for liabilities.
Equally a large responsibility is that you are dealing with the public funds directly. So given these two, what they have stated is what probably, is what anyway all of us are wanting to do.
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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?
Fortunately, the regulations, the supervisory requirements are all the same. Either you are a small finance bank or a universal bank, you are also going to get into business supervision. So, by the compliance standards, all are the same- for small finance banks or for the universal banks.
So, it is not going to give any regulatory arbitrage. So, it allows the banks which are converting to universal banks, to do a few more products. At this point of time, we believe that one is obviously from a name, it is a Suryoday Small Finance Bank, you become Suryoday Bank Limited, which has certain advantages, or which had a little bit more limitation earlier.
But today small finance banks are accepted in the ecosystem as regular banks. So, the only advantage is probably the reduced PSL (Priority Sector Lending) requirement.
But of course, it is a natural progression. Move on, prove yourself as a small finance bank. Move on, there will be more institutions which 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 ?
It will take a little time. But what certainly does is that it gives a view of the customer beyond just saying whatever we are currently doing with the credit bureau. Well, not much in terms of any other data except for a (better) credit bureau scope. And specifically it becomes extremely difficult, if the credit bureau track is not there specifically for NPC (National Payments Corporation). So those data, they are trying to get that into the digital domain and that will be kind of used as a way in terms of picking up other data and doing meaningful assessment.
Somewhere over and across, the regulator is also looking at that- overall who needs a fund for a meaningful purpose. The banks should really do all that is possible to make it seamless, frictionless. However, they do not want the banks to fund or the regulators to fund each and every one that they require without any purpose- as this will lead to indebtedness, which will hurt the consumer first and certainly in parallel the institution as well.
This will be a superb mechanism in terms of ensuring that overall, there has an underlying purpose. It will become almost like an UPI in the lending space.
The intent is to all those payments are coming through UPI and can all those data be used and kind of used meaningfully for giving them an access to lending. Over a period of time, more than the access to lending, what it is likely to do is the convenience in which we can take the money and more importantly the convenience in which we can repay the money and even pre-close the loan.
Yes, it will have a massive kick-off initially as in anything else new platform. 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 depoit (FD)? Do you think it will be profitable, or will people feel attracted towards it?
It is not finalised yet. We are thinking about it in terms of what does it really take. For instance, the mutual funds are competing with the banks in terms of multi things including fixed income and all of that. What does that mean? What banks can do within what is permissible regulatory limit and what is good for the consumers.
The intent of this is not to do a 20-year FD at one go. Then they can go and buy even a government security for a 20-year period. I would say for a period of 11 years and there are 10 years, 7 years when it will really finalise the contours. Post that there is a steady income for the next 10 years. So, this will be planned but it will have two usages. One, it will have a usage where the kid has started going to school. In 11 years time, the kid will complete 12th standard and post 12th standard then there will be a steady stream of returns which will be used for paying fees, part of the fees, full fees depending on how much are they really selling now.
The other one is that the certainty that this is the kind of a return that is available. Today, the fixed deposit rates vary anywhere between 7% in public sector banks, 12.5% in small finance banks.
So while we are assessing in terms of what are the risks involved to the bank, the committing of fixed rate and what rate should it be so that we do not take an excessive risk. It will be more like a pilot to start with, a small quantum. And if there is a real interest, then we will kind of size up in terms of what are the risks that are there.
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