SFBs have a liability franchise to take care of in addition to the lending business. This is increasingly significant in the wake of the Yes Bank crisis, after which depositors are perhaps more likely to prefer larger, more established names.
The last few weeks have been very volatile for stock markets around the world. The Indian financial sector has been hit particularly hard, as it was already reeling from the collapse of Yes Bank when the novel coronavirus delivered its knockout punch.
Share prices of lenders to the bottom of the pyramid — small finance banks (SFBs) and NBFC-MFIs — in particular have been tumbling. While a small rally was seen in the past few days, one-month returns in March 2020 range from -37 percent to -64 percent. It may seem like eons ago that these stocks were trading at their lifetime highs, but in fact, it was only a little over a month ago that financial inclusion companies, with their high margins leading to high returns on equity, were investment darlings.
This encouraged larger banks, recently burned by asset quality shocks from wholesale lending, to focus on “retailisation” and building their microfinance arms. Competition in the micro-lending space was heating up, and was welcomed by existing players who believed there was room for multiple players to coexist without encroaching on each other’s market share. Universal banks, SFBs, and NBFC-MFIs all sought a piece of the pie.
Unlike NBFC-MFIs, SFBs have a liability franchise to take care of in addition to the lending business. This is increasingly significant in the wake of the Yes Bank crisis, post which depositors are perhaps more likely to prefer larger, more established names. SFBs are far newer than universal banks, and are still building their brands. They are perhaps hindered by the words “small finance”, which, if anecdotal evidence from management teams is to be believed, dilutes legitimacy of the business in the eyes of potential customers. Also unlike for universal banks, lending to the bottom of the pyramid is not just 10 percent of their overall business. SFBs are far smaller, with a lower capacity to absorb losses from bad loans. And the current climate has drawn attention to the high risks associated with priority sector lending.
Disbursements to be affected
In India, the lockdown instituted to protect the nation against the novel coronavirus has worst affected the low and middle-income individuals, who also happen to be the target market for SFBs. Daily wage earners and self-employed individuals and groups may stop receiving any income whatsoever during this time. While the RBI has granted temporary relief to borrowers in the form of a three-month term loan moratorium, SFBs are likely to see the difficulties faced by their borrowers reflected in asset quality numbers in Q2 of FY21 — the damage will likely only be deferred, not mitigated.
Disbursements in upcoming quarters will also be affected. A portion of Q1 of FY21 is likely to be spent in lockdown, during which no disbursements will be physically possible. However, even after the restrictions are lifted, consumption in the interiors of the country is likely to remain subdued. Big spending decisions may be postponed in anticipation of further instability, potentially affecting home and vehicle loans. Deposits are already in a precarious position, and without certain key distinguishing factors that attract customers to SFBs, are likely to grow even more slowly, if at all.
One of the key differentiators from universal banks is the personalised customer service SFBs are able to offer. This includes home visits not only for loan collections, but also for deposits or even withdrawals. In fact, branch managers suggest that SFBs are successfully being able to attract customers who have become fed up of poor service from larger banks (including public sector banks) because of their reputation for doorstep service.
Another key feature of SFB operations is the concept of monthly meetings. These usually involve some sort of activity, such as a free medical check-up, organised by the SFB as an incentive to show up, and serve as a collection point, a marketing tool, and a way for SFB employees to take a pulse of the market at a local level.
Of course, in the current situation, such personalised service and monthly meetings are impossible. What remains uncertain, however, is in what shape these offerings will be continued after the lockdown is lifted. It may well be that certain restrictions may remain. For instance, collection agents going door to door to handle cash may be deemed a public health and safety hazard for months afterwards.
To remain competitive, SFBs will need to adapt. RBI Governor Shaktikanta Das ended his address announcing the monetary policy measures devised to tackle the impact of the coronavirus with the words “Go digital”. SFBs have long extolled their digital initiatives, including availability of payment options and awareness campaigns around how to use them. However, this digital readiness seems to have been exaggerated and a large part of their operations remain ‘high-touch’.
The novel coronavirus is a tough break for SFBs, which have been hit by a steady barrage of challenges. SFBs with exposure to Assam have barely recovered from the recent political unrest in northern areas of the state, and others have just about navigated the after-effects of floods in Maharashtra and Karnataka. Demonetisation and the Andhra Pradesh microfinance crisis each had a lasting impact, but the infrastructure remains challenging. Even if the economic reality post-coronavirus is not radically different from what we are used to, business continuity plans will need to be made far more robust. In case of SFBs, I’m not sure to what extent this is possible.Stuti Johri is an investment analyst at Trivantage Capital Management India Private Limited. The views are personal.