With financial inclusion as its goal, will Ujjivan’s Small Bank be able make a big dent?

On Monday, the third largest microfinance entity in India, Ujjivan Financial Services Ltd, announced its transformation to a Small Finance Bank (SFB).

Listed under Ujjivan Financial Services (regulated by the Securities and Exchange Board of India (SEBI) and listed with the Reserve Bank of India (RBI)), Ujjivan SFB will be piloting its operations across five branches in Bengaluru, which will be providing full service offerings for the SFB.

By the end of this financial year, the number of branches will increase to 15.

The firm subsequently plans to extend these services across its 457 branches across 24 states in the coming months.

The Small Finance Banks

In September of 2015, the RBI had granted in-principle license for small finance banks to 10 entities amongst a group of 72 applicants. One of them includes Ujjivan's arch competitor Janalakshmi Financial Services.

Similar to commercial banks, the idea behind launching SFBs was financial inclusion and to undertake basic banking activities, while accepting deposits and lending to the underserved.

Further, according to regulation, the maximum loan size and investment limit exposure to single or group borrowers would be restricted to 15 percent of capital funds. An SFB is not allowed to set up subsidiaries to undertake non-banking financial services activities. And with limited scope, after the period of five years, the RBI may liberalise the scope of activities for Small Banks after proper reviewing.

Ujjivan is the fifth entity amongst the license holders to launch its SFB.

Speaking at the launch, Samit Ghosh, MD and CEO of Ujjivan Small Finance Bank Ltd, said,

In 2005, we stated the initial objective was to open a bank. In the past, we had a dialogue with the RBI to create a specialised bank structure for savings and remittances. Over the course of two years, we have spent a lot of time understanding the underserved market extensively, and invested in technology as well as people. Each of our products is modified to fit the underserved segment, with a special kind of delivery vehicles deployed.

Standing strong to his commitment, he added,

The Ujjivan Small Finance Bank is not focused very much on the middle-class customer segment, but rather completely on the underserved and underbanked community, as Ujjivan has already been.

As a part of this transition, Ujjivan has moved 8,000 of its employees from the microfinance vertical of the business to the banking vertical, with 2,000 new entrants hired in the banking vertical. At present, the business has 9,821 employees.

Speaking to YourStory, Ittira Davis, Head of Transition at Ujjivan Small Finance Bank, said that training provided to employees started in February last year across three phases of education on banking, regulation and Ujjivan SFB’s products.

He also claims that the company has allocated a budget of approximately Rs 16 crore on training and Rs 400 crore (over five years) on various technology investments. At present, the firm is working on Infosys’ Finacle as its core banking solution and using Wipro as a system integrator on its technology front.

Of deposit rates and USPs

Apart from an array of basic services like RuPay Debit Card, Mobile Banking, and Biometric ATMs, Ujjivan SFB will provide a market interest rate of 4 percent for a basic savings bank account, while interest rates on Fixed Deposits (FD)and Recurring Deposits (RD) will be in the range of 5.5 percent to 8 percent.

Upon comparison, this is slightly more competitive than what commercial banks offer, which is up to 7.5 percent in interest for fixed deposits compounded quarterly.

Further, the firm also boasts about fast account opening within seven minutes using the power of eKYC and Aadhaar. Apart from that, the bank also points to the fact that there is no concept of initial deposit during entry and average balance, unlike other commercial banks.

According to Ittira, the RD account requires an initial investment of as low as Rs 100, while the initial investment for an FD stands at Rs 1,000.

The Ujjivan SFB also has a concept of centre meetings, where the customer and the banking executive meet halfway at the dedicated banking centres selected and set up by Ujjivan. They are also launching the concept of a mini-ATM, which will provide the comfort of withdrawal of deposits, remittances as well as transactions.

While only piloting with five in Bengaluru, the firm plans to open 66 new branches in the rural unbanked areas. Samit says that by regulation, SFBs need to have 25 percent of their branches in rural areas (for the first three years), which Ujjivan’s network already holds.

Challenges to scale

When asked, Samit puts across a few big challenges that have to be faced as Ujjivan transitions into a Small Finance Bank.

• Technology expectations: Having budgeted Rs 400 crore for technology investment over five years, Samit laid emphasis on how the technology innovations should work at the same time, up to the expectations.

• Retaining employees: Another challenge during the transition was absorbing all the employees to Ujjivan, while giving them the necessary training on banking operations.

• Business perspective and literacy: Rather than focusing on the affluent, Ujjivan SFB is focused on the rural and underserved. Hence, Samit adds that financial literacy becomes a huge challenge when it comes to this customer segment.

After March, the bank plans to go out to acquire new customers, with the current aim being to tap and convert the already active 3.5 million customer base of Ujjivan Financial Services Ltd. Samit is positive that the firm will be able to convert its entire customer base to open a bank account with Ujjivan by the end of the next financial year.

Sluggish growth and margins

The recent demonetisation and shortage of currency had a considerable impact on the microfinance market in terms of collections for outstanding credit.

For Ujjivan, this lower collection efficiency and the cost of SFB operations meant a net fall in profits by 11.87 percent to Rs 44 crore in Q3.

Speaking to reporters, Samit said,

Post demonetisation, there has been a considerable impact on the business, considering the shortage of currency. However, with remonetisation, we are seeing some stability, with customers being able to repay their loans. To give an idea, the repayment rate in November stood at 90 percent, a decline from the otherwise average 99 percent, with the repayment rate for January standing at 97 percent.

Further, Samit said that they had made additional provisions for NPAs (Non-Performing Assets).

On being asked whether it was the right time to launch the SFB, Ittira said that the deposits will in turn help the bank reduce interest rates, as is already happening in the ecosystem post demonetisation. This would further help pass the benefits on to the consumers in the form of competitive interest rates.

Samit agrees that the current scenario will help the liability side of the business to scale.

The firm, at present, has a loan portfolio of close to Rs 6,525 crore, and had raised Rs 887 crore in an IPO last year.

The Indian unbanked

According to a 2015 report by PricewaterhouseCoopers India, India's unbanked population that year was 233 million. This reduced by half within a year, owing to the Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme. Further, it is reported that an additional 68 million accounts have been added to the scheme, as of November 9, 2016.

This still leaves 165 million-odd people out of the banking gamut altogether. Further, according to media reports, the Centre acknowledged in June last year that 40 percent of the country was still 'outside the ambit of formal banking'.

In the past, the government has given birth to business models like Small Finance Banks (SFB) and Payments Banks to further the gamut of financial inclusion. While three 'Payments Bank' license holders have already called it quits, the Small Finance Bank is where the action really seems to be happening.