Rules of MFI business is set to change says R Baskar Babu, MD & CEO, Suryoday Small Finance Bank. Considering how cycles affecting the business are getting shorter and unpredictable, one needs to build in a robust buffer for provisioning, he says in an exclusive interview with businessline. Betting on micro home loans and loan against property (LAP), Babu explains that these will be the bank’s focus areas. Edited excerpts:

The bank got listed at the peak of the pandemic. Though it’s not been a smooth ride, considering how some of your peers, now looking to list, have a dip in offer size or valuations – you think you took the right call?

We had regulatory requirement for listing, and we wanted to be fully compliant with all licensing conditions. When we were listing, the first wave of Covid was almost settled. Nobody saw the second wave and it happened just the next month of our listing. While the credit losses were clearly visible, what was not factored was the possibility of a second wave as severe as it was. Unfortunately, we did not have any opportunity to deliver a solid financial performance post listing till the June quarter. But as we settle down, the market will recognise us in the same momentum as it did not reward us till now. In fact, when markets start to recognise the value of SFB model, then all of us as a cluster will be recognised.

June quarter was a comeback period, though the gross NPA remains high…

We will provide for any temporary slippages out of our operating profits and we are focusing on getting back our NPA customers back in the paying fold and we see that happening and that is encouraging . We need to increase our focus on this.  But, considering the nature of the business, it may be 2–2.5 per cent credit loss business on a yearly basis. When you normalise what happened during demonetisation and now, its looks more like that. Low-income household funding is not necessarily dependent only on the customer segment or as a portfolio. There are various localised nuances. In the last 10 years, every five years there is some event or another which you’re not able visualise as part of the usual risk management approach. The learning is that this business (unsecured lending) must provide for 2–2.5 per cent credit loss on a yearly basis, and even 3 per cent if you have the best systems. You’ll have to keep a sufficient buffer for one-time events.

What’s your take on the new MFI guidelines?

Post pandemic, many of us have started dealing with customers on one-on-one basis. We are lending in a group and collecting in a group from an operational perspective, but we are not enforcing any joint liability. The new MFI norms are encouraging as they allow us to have a household view not a customer view. Based on household income, if I give a ₹3 lakh loan for five years, the repayment is around ₹9,000 a month. But a ₹1 lakh loan for one year will have a repayment of ₹10,000 a month. So, the new norms will make all players look at customer relationship. Three-year tenure loans will become common, while it was unheard of as an MFI product.

But until 2017, MFI was a high growth, low risk, high return model…

It will be 15–20 per cent growth segment as the customer segment graduates to other secured loans or loans for specific purpose.If we can handle a small-ticket LAP for business purposes efficiently then we should start looking 3 – 7 year loan rather than the pure MFI loan. The pure customer base of MFI is flattening.

You’ve guided for doubling of your loan book in 3–4 years... Where are the opportunities in terms of products?

We’re bullish on micro-home loans – between ₹5–10 lakhs. It’s a tough, long gestation business. Every month we’re increasing disbursements in this segment by a crore. Likely, by end of this financial year, we should be at around ₹15 crore. When the scaling of the business happens, and we have presence in 500 locations, and each location does around ₹50 lakhs of business, then it becomes a good scalable business. Right now, we are not chasing volume. We are setting the processes to make sure that whatever is acquired is going to be super-duper portfolio. This is a category where even affordable home loan companies are in the ₹8–10 lakhs bracket. Micro-LAP is another area of interest. It’s a low-delinquency business and we want to build it through our branches.

Do you have any fundraise plans this fiscal?

The reduction in capital has come down mainly on account of NPA issues. At these levels it would be inefficient to raise any capital. But if there is an opportunity which comes our way, we’ll load up capital.

Do you see such an opportunity?

Not this year. This year, our intent is to go back to the pre-pandemic pre-operating profit levels. Alongside that, we will focus on a few key value products every month, which is intensive in terms of execution but can give a highly competitive advantage. Internally, I keep telling everyone that even at a size as small as ₹5,500 crore, one of every 200 Indian households are customers of Suryoday, which is 0.5% of the Indian population. So, the intent is to operate at a pricing level that low-income households can borrow almost the same rate as a middle income.