Equitas Holdings, a financial services provider that focusses majorly on low-income people and tiny and small enterprises, had assets under management (AUM) of ₹8,926 crore as of June 2018. It began operations in 2007 with a focus on the microfinance (MF) segment, and now offers a wide portfolio of products. It launched the small finance bank in September 2016. PN Vasudevan, Managing Director and CEO of Equitas Small Finance Bank, spoke to BusinessLine about the NBFC’s transition to an SFB, its growth areas, and challenges. Edited excerpts:

Has growth come back to the microfinance segment after the effects of demonetisation?

Last year we were impacted and had to take a decision to write off over ₹140 crore. The recovery has been normal over the past one-and-a-half years. In microfinance lending, we took a conscious call to reduce exposure, though demand is significant. The contribution of microfinance to the overall loan portfolio was brought down to 28 per cent in the quarter-ending March 2018 from 46 per cent in March 2017. So, we slowed it down.

Over the next three years, we expect microfinance loans to grow at about 20 per cent, but other businesses will grow faster. So, this current contribution of microfinance at 28 per cent will come down to about 15 per cent.

How about non-microfinance products, and which are the fast-growing ones?

We diversified into other areas, such as housing finance and the used truck market as early as 2011. In the last couple of years, we introduced the micro enterprises business, and agri and LCV loans, which are gaining strong momentum. Micro enterprise loans are in the range of ₹50,000-5 lakh, and are offered to tiny units. The average ticket size of this secured product is ₹1.5 lakh. Under business loans, customers are provided loans in the range of ₹5-25 lakh. Agri loans are offered depending on the size of the landholding and starts from ₹50,000. All these products are doing well.

Are these specialised products helping you to further the agenda of financial inclusion?

Our products address groups at the lower end of the pyramid. And practically no one caters to these segments, which are financially-excluded categories. In our micro enterprise loans, 95 per cent of our customers are first-time borrowers. In business loans, nearly 65 per cent of our customers are first-time borrowers from any formal institution.

How are you maintaining growth along with a focus on financial inclusion?

Equitas is not in the business of grabbing market share from others but we create new market segments. Since our target segments are not addressed by any institution, we don’t have much of competition. So, we are able to lend at the right rate so that there is no comprise.

Second, we can engage and tell customers about the risk of going beyond their payment capability. We have built strong expertise in assessing the cash flow of informal customers over these years, and have successful models for the various types of products.

Almost two years have gone by since Equitas became an SFB. Tell us about the experience.

After becoming an SFB, we emerged as a diversified lender with a range of products, and all of them have gained traction in the market.

The SFB tag has also created a certain amount of confidence among customers when we lend; and the reception in the market is much better after becoming an SFB.

On the cost front, what are your efforts to reduce it?

We spent significant money in setting up 375 branches and IT systems in the past two-three years. The branch network is significant, and we don’t expect to do any big addition in the next couple of years.

In building the IT systems and related infrastructure, we would have spent close to ₹200 crore.

Because of the same, our cost to income ratio shot up to 83 per cent in December 2017 (other mature banks have it at 50-55 per cent) from 53 per cent in FY16. So, there is huge stress on profitability due to this high ratio.

But it was brought down to 76 per cent in Q1 of this fiscal. By March 2019, we expect the ratio to come down to 70 per cent, and gradually move towards 55 per cent level in about two-three years.

What are your borrowing plans to support growth?

Interest rates will inch up. We actually upfronted some borrowings as we realised four months ago that there would be a rate hike. Though it was still higher, it was 1 per cent less than what it is today.

About 50 per cent of our total borrowings is in deposits. Our deposit flow has been pretty comfortable, and by the end of this year we expect the share to increase to 70 per cent.

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