No plan to pass interest rate hike to MFI customers: Suryoday SFB's Babu

The Reserve Bank of India (RBI) recently flagged high growth of small finance banks (SFBs) that could impact their asset quality. R Baskar Babu, managing director & chief executive officer of Suryoday Small Finance Bank, tells Manojit Saha in an interview that the regulator wants these lenders to rebalance the portfolio to moderate growth risks. Edited excerpts:
 
The RBI in its June Financial Stability Report observed that the high balance sheet growth of SFBs from a low base raised some concerns on asset quality. Do you think SFBs are going at a bit of a fast pace and sometimes compromising on the underwriting standards?
 
I do not think so. Being a bank for the past five years is quite a bit of learning for us. All the growth we do is also balanced with adequate or more than adequate risk-control measures. To that extent, the regulator wants us to rebalance the portfolio, moderating the growth risks, etc. so that it does not cross the line where the growth creates more risks than is known to the banking sector. However, we have seen a once-in-a-lifetime impact due to Covid in the past two and a half years. The impact has been larger on low-income households. The good news is this segment is recovering a little faster than the economy is. We are seeing improvement in all parameters, including collection efficiencies and reduction in gross non-performing assets (NPAs).
 
The RBI has observed that the standard restructured portfolio of SFBs remains higher than the pre-pandemic levels? Do you see a significant part of that portfolio turning non-performing?
 
It does on a temporary basis but a not very significant part. When around 60-65 per cent of the portfolio starts repaying after coming out of moratorium, there is a possibility of them skipping an instalment once in two-three months. But this need not necessarily turn into a credit loss as these customers have a good track record.
 
 
The past two financial years were difficult for SFBs. Do you think this year could be a normal one?
 
It tends to become a normal one. Each quarter looks better than the previous quarter. It will move toward normalcy as the year progresses.
 
In the first quarter (Q1), Suryoday SFB’s gross advances rose 1 per cent and disbursements 3 per cent quarter-on-quarter – which are lower than some of the peers. Are you slowing down on business growth and focusing on collection?
 
Usually Q1 results are not substantially higher than Q4 across the financial sector. We are not slowing down on growth, but focused on ensuring that growth is not coming at the cost of robustness of the portfolio or collection efficiency. There is 25-27 per cent growth on all parameters year-on-year. That was our intent, to have growth rates between 20 per cent and 25 per cent.
 
Given that robustness has returned to the micro finance portfolio and also the other segments we operate, the focus will be on balancing the portfolio.
 
 
How do you see the rising interest rate scenario in terms of customers’ ability to repay it?
 
Rising interest rates impacts big-ticket loans taken for longer tenures. Since we are in the low-ticket, low-tenure segment, we are not intending to pass on the half a percentage or 75 bps interest rate rise to micro finance customers. We are retaining the same price we operated six months back.
 
We are also having excess liquidity, which is low earning now, will be converted into earning assets. Impact of incremental increase of 50 to 75 basis points of cost of borrowings will not have any impact on the P&L for this year.
 
 
Suryoday has strengthened its collection team. Have you seen an encouraging trend in Q1 so far collection efficiency is concerned?
 
We are looking at a collection efficiency of 2 per cent every quarter. Efficiency is close to 90 per cent at this point of time, and we intend to go beyond 95 per cent towards the end of the third quarter. Collection efficiency of the portfolio built after July 2021 is now around 98.5-99 per cent.
 
We have witnessed good traction on the ‘specialised collection task force’, which is focused on customers who have not paid for six months at a stretch. We have seen close to 30,000 to 35,000 customers coming back to paying.
 
Gross NPA (GNPA) as on March end was 11.8 per cent and the plan was to bring it down to 8 per cent by June. Do you think you were on track to achieve the target?
 
We are yet to declare the results, so we will not be able to share the numbers. We aim to bring down the GNPA number to 8 per cent by Q2. In Q1, we provided close to Rs 40-50 crore of stressed assets, and the residual amount will be provided in Q2. So we are on target.
 
What is the longer term and medium term road map for GNPAs, say four or five quarters down the line?
 
We aim to achieve 3-4 per cent of GNPA and 1.5 per cent of net NPA. We expect to achieve that close to the end of the financial year.
 
Last year, the bank’s provisions were about Rs 400 crore. Do you think the provision could remain elevated or the requirements could be much lesser this year?
 
We will go with what we have guided. That we will do whatever provisioning is required in Q1 and the spillover in Q2. And thereafter whatever provisioning is required is more in terms of regular and normal. The provisioning will not be as elevated as last year. We believe the worst is probably over.