Bengaluru-primarily based microfinance agency Ujjivan will remodel itself right into a Small Finance bank (SFB) in the subsequent calendar year, turning into one of the first ten banks on this category. Samit Ghosh, the 62-yr-old founder and managing director of Ujjivan, is a primary technology entrepreneur and an experienced banker with over 30 years at Citibank, trendy Chartered and HDFC bank. In an interview with Manju AB, Ghosh talks about the challenges of transforming the lender from a microfinance organization to an SFB.
Q. in the subsequent calendar yr, Ujjivan becomes an SFB into which all the property of the MFI could be transferred. Ujjivan will stay just a maintaining organization and the SFB needs to be indexed in 3 years from the start of its operations. So why are you listing Ujjivan now? In 3 years’ time you will have listed entities.
A.yes, under the modern rules, this will be the case because the SFB will must indexed in 3 years. We are exploring the opportunity of a reverse merger. If there may be a reverse merger with the holding agency and the subsidiary, then there could be just one listed entity. Discussions are on with the regulator on these operational issues. Thinking about the scale and the nature of commercial enterprise, we can also ask for extending date of listing for the SFB. The SFB will start off as a wholly owned subsidiary, and later, if RBI allows, it’s going to merge into Ujjivan. While the SFB is shaped, all its shares might be allocated to Ujjivan.
Q. Why turned into listing of Ujjivan important? Will the funds be ploughed lower back to construct the financial institution?
A. Our foreign shareholding became close to 90%. We need to bring it down to 49%. With the pre-IPO, it came down to seventy seven% and post IPO, it will likely be around 44%. IPO become the simplest direction to be had to convey down the large foreign shareholding. We could not have gone for a non-public placement, a path some of different gamers who have got the SFB licence are taking. We can raise approximately Rs six hundred crore to Rs 800 crores. Yes, it’s going to assist us in putting in the financial institution.
Q. in the purple herring prospectus, the employer says that the RBI guidelines on the SFBs are uncertain. What needs to be clarified?
A. The draft recommendations are precisely the same as the prevailing guidelines for industrial banks. RBI is in discussion with us on the way to revise the ones recommendations to suit the wishes of the SFBs and their clients. Take for example the branch community – almost hard to transform MFI branches to financial institution branches overnight. We intend convert approximately forty of our current branches into financial institution branches and over a duration of three years all our 470 branches will be converted. We anticipate RBI to take into account those inside the final hints. RBI has made it very clear to us that precedence sector lending requirements of seventy five, capital adequacy of 15% the CRR and SLR aren’t negotiable; it’s far obligatory as we remodel to a bank. We are commonly enticing with the regulator on the operation side.
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Q. when the SFB is set up, 20% of the earnings ought to be transferred to a unique reserve fund. You are saying that this may restrict your ability to pay dividends. Will it additionally limit the 20% to twenty-five% of the returns that you are giving your equity buyers?
A. this may also be a trendy requirement. We’re already making earnings. That isn’t going to be an assignment. We have to be capable of cope with that. We are not a start-up state of affairs. We are able to pay dividends and additionally pay our buyers returns. No main subject here.
Q. almost your complete e book is unsecured and organization lending on a peer assure version. How do you plan to trade the nature of the loans to character loans and with collateral?
A. we’re progressively changing the profile of our clients to deposit taking customers. So, all our customers – approximately 2.6 million clients – could be our savings bank clients. We can work out schemes to mobilise time period and savings deposit from our customers. We can no longer be able to convert entire patron base with securities as these are bad human beings from the urban and the semi-urban regions. That is something that RBI will should check both in phrases of guidelines and the quantum of security needed. The whole philosophy of microfinance is that those human beings are poor and that they do now not have safety to provide, making the MFI version a successful one in these regions. Our competition is that that is a special set of customers who do not have adequate securities to cough up so there have to be another set of regulations at the same time as handling customers of this category. How many of property have to be unsecured and secured needs to be closely studied, and for the small finance banks, these ratios want to revisited.
Q. There had been poor cash flows from operations in the beyond. What’s the motive for this?
A.that is primarily due to the reality that we were funding a giant part of our financing activities thru external borrowings. It’s miles the element and parcel of the enterprise operations. A poor coin go with the flow in some other commercial enterprise would be absolutely poor but for an MFI. We are continuously borrowing for on-lending. We aren’t developing any constant assets with the money we borrow. They may be all rolling capital. Not like the banks, we are sitting only on one facet of the balance-sheet that is the belongings side. We do no longer have any liabilities or deposits like business banks who have inflows as financial savings and deposits. We installation quick-term budget for introduction of lengthy-term belongings. Constantly, our increase is funded by using borrowings.
Q. How lots of price range do you increase annually? Do you furthermore may enhance cash from the money marketplace?
A. e book length is near Rs five,000 crore and our borrowing is near Rs four,000 crore. This internet borrowing at some point of the monetary year is Rs 3,700 crore. About 70% of our borrowing is from public region and private sector banks. Economic establishments like Sidbi, Nabard and Mudra account for 10% of our funding requirements. About sixteen% of our investment comes from NCDs (non-convertible debentures) into which the mutual finances have invested. We are constructing our brand within the cash marketplace so one can help Ujjivan as a financial institution. Our first business paper had a tenure of 3 months and then we had a roll on of the identical CP. It turned into a Rs 50 at coupon charge nine.seventy five%. This economic yr also we can raise about Rs 500 crores of commercial paper at tons decrease costs. So subsequent yr as a bank we’re well set to release the certificate of deposits.
Q. Banks are saddled with such huge NPAs. How come your NPAs are low and recovery nearly 100%? Any robust arm methods used to recover cash?
A. No robust arm tactics in any respect. We are very touchy in terms of our series strategy. Even in the group lending version, we do now not implement the organization ensures. We only tell them to attend to the primary 3 installments. Sturdy arm processes will result in the crisis we’ve seen in Andhra Pradesh. We have interaction with our clients very closely and apprehend the stress conditions and deal with this.