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Small finance banks moving to individual lending

With a majority of small finance banks already operational, a challenging start has already forced a number of them to tweak lending strategies. Due to demonetisation, coupled with rumours of debt waiver, the delinquency rates for micro-lending has shot up as high as 10 per cent, against about one to two per cent prior to note ban.
Hence, to bypass the risk associated with group lending, several small finance banks are looking to quickly migrate to secured individual lending, mostly to non-agriculture sectors. “We are planning to diversify our portfolio to minimise the risk associated with group lending,” said Rajeev Yadav, managing director (MD) and chief executive officer (CEO), Fincare. “As a bank, that would anyway have been a focus area.
However, due to demonetisation, there is an additional focus to move quicker than anticipated to individual lending.” From about 90 per cent unsecured group lending portfolio, Fincare is looking to reduce it to around 50 per cent in the next three to four years.
Kerala-based ESAF small finance bank, too, is looking to reduce group lending portfolio from 95 per cent to 75 per cent by the end of this year. Meanwhile, with about six months of operations, the bank has garnered deposits of around 125 crore.
Suryoday Small Finance Bank, which too has completed about six months of operations, is now looking to migrate its microfinance group lending customers to individual lending category. From about less than one per cent individual loan lending portfolio, the bank’s individual loan portfolio now stands at around 5 per cent of lending. 
By the end of this year, the bank expects it to scale up to 25 per cent of lending. In the long term, the bank expects the group lending portfolio to be less than 40 per cent of its lending, according to Baskar Babu, MD and CEO, Suryoday Small Finance Bank. The bank has been rolling out products like working capital loans, housing loan and vehicle loans in its portfolio. “We want to acquire new customer through group lending, and want to graduate them into individual lending,” added Babu. Soon after demonetisation, in December 2016, the Reserve Bank of India had granted additional 60 days for repayment of certain loans, including microfinance loans, which were due between November 1 and December 31, 2016.
Later, it extended the repayment tenure by another 30 days, giving farmers a window of about 90 days extra to repay loans due within the stipulated period.
Meanwhile, the debt waiver buzz severely impacted recovery in states like Uttar Pradesh, Maharashtra, Uttarakhand, Madhya Pradesh and Karnataka. Microfinance loans collection had come down to around 85 per cent, against nearly 99 per cent prior to demonetisation.
Small finance banks have been relying heavily on group lending. Bandhan Bank, which sees 90 per cent of its business coming from micro loans, saw a substantial rise in non-performing assets due to the farm loan waiver. Most of the loans were for allied agriculture activities, and did not qualify for debt waiver.
“Farm loan waiver in Maharashtra and Uttar Pradesh has affected the repayment culture. Small borrowers have stopped repaying all kinds of loans, which has affected the overall repayment,” C S Ghosh, managing director and chief executive officer, Bandhan Bank, recently had said.
As on June 30, 2017, Bandhan’s gross NPAs rose to ~175 crore, accounting for 0.82 per cent, against 0.22 per cent in the same period previous year.
Earlier, HDFC Bank saw its saw its gross NPAs ratio rise to the highest in seven years, mainly on account of farm loan waiver. The bank’s gross NPA ratio rose to 1.24 per cent for the June quarter from 1.04 per cent in the corresponding quarter a year ago.
Business Standard, New Delhi, 05 August 2017


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