The big question really is can the ramp up in your non-MFI book support the 35% plus growth over FY18 to FY20 or not?
This year, we have been consciously reducing the micro finance (MFI) book because of the events that have happened starting with demonetisation and the MFI book is expected to go down by about one-third. But in spite of that, we expect this year to end on an overall growth of about 15% which would be supported by approximately 50% of growth on the non MFI book.
On the non MFI book, we have the commercial vehicle which we have been doing for about six years. We have started the new commercial vehicle also recently and within the first few months we have been able to get about a 1.5% market share in the light commercial vehicles and we do have a long history of having done commercial vehicles in the earlier organisations. That strength is something that we always bring to the table as far as the commercial vehicle segment is concerned. We are very lucky that the economy is picking up now as also the commercial vehicle segment. We do expect good growth in the next few quarters from the commercial vehicle segment.
The other segment that we have done is the loan against property and the SME loans which again we have been doing for a about five years now. We see a strong traction there and post becoming a bank, we have been able to add more products into the SME segment and the initial traction in the last 9-12 months has been very comfortable and that is again something we expect to grow because when you are talking of SMEs in the range of say Rs 10 lakh to 50 lakh of loans, we do not see too many players seriously offering products in that segment.
There is a lot of wide spaces in that market and there is a lot of potential demand which is not currently being properly serviced. Again we expect a good amount of growth and demand to come from there. We expect to maintain 15% growth for the current year and going forward. We are not right now commenting on the percentage of growth but the opportunity remains very high.
As far as microfinance is concerned, while we are dropping the volume by about one-third this year but next year onwards microfinance will start growing again but albeit at a smaller rate. The overall contribution of MFI will come down from about 35% currently to about 15-20% at some point in time.
Could you give me quick numbers really about your internal targets for CASA for FY18-19? Would you be able to retain your savings account rate at a little over 6%?
See CASA we have had a good initial traction, we have just completed one year of being a bank, about 40% of all our borrowings today come from deposits. Out of that 40%, 28% is contributed by CASA which is about 900 crores as of September. Now if you look at FY18-1, again some more of our old borrowings in the form of NCDs and refinance from institutions will keep maturing over the next one year. These will again get replaced by deposits and by March '19, our deposit contribution to total borrowing from the current 40% should probably go up to about 65% plus.
Out of that 65%, the effort of course would be to try and ensure that the CASA percentage remains at around the 30% plus level. We have some decent advantage from the cost of funds of perspective. On the savings interest, we do offer 6% and 6.5% right now and that may continue for some time till we reset it in line with the other changes in the market.
Also, we have to talk about the growth strategy for the next one to two years. Would it be safe to expect ROA will be back to 2% levels and your ROEs will jump back to 12% by FY20? Would that be a correct assumption and if so, what according to you will drive these kind of numbers?
Before we became a bank, when we were an NBFC, our ROA used to be in the range of around 3.5% but as an NBFC, your denominator is just about loan book. Outside the loan book, there is not much of a denominator book but in a bank you have to have a 30% investment portfolio. Comparable ROA for a 3.5% ROA of NBFC and a comparable ROA of a bank could be anywhere in the range of 2.5%. We have set up 375 branches for liabilities in the last one year and right now we are losing money on those branches because they are still building up the CASA and the fee income momentum. But once the liability branches mature and start breaking even, they will start positively contributing.
This could be approximately one and a half to two years from the time the liability branches are set up. The liability drag should come down on the bank and then the entire benefit of the growth on the asset should be felt on the balance sheet. When that happens, probably in a three-year timeframe, we should be able to look at getting back to our original ROAs which were there as an NBFC adjust for our investment book of course. You should be able to look at a 2% plus ROA. Maybe in a three-year timeframe, the entire rollout of the bank and the leveraging of the liability branch should be completely done.
Once that happens, we should be able to look at a pretty decent ROA and the advantage for somebody like us in the small finance bank space that we operate in is that on the asset side, we are lending to a significant number of people in the segments which are not very efficiently serviced by the other mainstream banks and other players. The opportunity to grow on the asset side always remains very high, the only question always will be how do we keep our control over quality of the portfolio intact on the asset side. As long as we can maintain our quality of assets properly on the asset side, growth is not really an issue.
The cost of capital is unlikely to go down, liquidity in the system will get tighter. Most of the NBFCs work on a simple principle which is that there is a borrowing mismatch, they borrow short and they lend long and that is how you make money. If the macro changes and if interest rates go higher will the spring time get over for NBFCs?
Yes, see as an NBFC when you are wholesale funded significantly, there is always the possibility that when the rates go down, you will have a long period of benefit when your spreads are actually increasing. The reverse happens when the rates harden. As an NBFC, you are positively and negatively impacted with interest rate movements but as a bank generally, you are more on a stable footing because your deposits are significantly retail.
What could be the impact of the so called digital disruption which everybody is claiming? There are Fintech companies which are claiming why do you need to go to microfinance companies? We can give you money on a platform. There are loans to the tune of about Rs 15000-20000 which some of the Fintech companies are saying we can generate online for you. Is this a serious disruption?
As of now, the significant contribution from the Fintech sector in the banking space in India has been mostly on the payment side and they have done a pretty good job, they have put up lot of services in terms of managing the payments. Even banks are mostly working along with the Fintech companies when it comes to managing the payment systems.
On the lending side, it is still a long way to go. First of all, the markets are more likely to become digital on the lending from the formal borrowers side. Typically the salaried segments who want to take a personal loan or an SME who has got all kind of formal documentations in place and where a credit assessment can be done in a purely offline basis could be on-boarded more on a digital lending platform than necessarily a physical platform.
But when you are talking of the customers from the informal economy, where they do not have much of documentation available and an offline or an offsite kind of credit monitoring is practically next to impossible, you have to actually go out and talk to the customer, find out what business they are doing, find out their income, cash flows, assess their cash flow before you take a credit call. All that is going to take a long time to come to digital because they do not have digital footprints on their income side.
You cannot sit on one side of the table in your office and try to do an assessment. The informal economy will take a long time. Right now, the focus on the lending platforms on digital lending platform is more on the formal side Even there, it is just at a very early stage and it is just picking up. So it is going to take time for the formal economy to come on to the digital lending platform and be able to get the loan serviced by banks digitally. The informal sector is still some time away.
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