City-based Equitas strives to bring banking to masses

The bank traces its origin to 2007 when Equitas functioned as a microfinance lender. It received its banking license from the RBI in 2016 and commenced operations as a subsidiary of the holding company Equitas Holdings Ltd. In an interview, Vasudevan, the MD and CEO traces the journey of his bank . 

To understand microfinance, we did a study to find out the needs from a borrower’s perspective. We also learnt how to deal with low-income consumers, who otherwise borrowed from moneylenders. We observed a few things missing from the supply side. Our pricing philosophy implied that the cost of growth should be borne by investors while the steady state cost would be incurred by the borrower. Assuming we aimed to service a customer base of 1 lakh or 5 lakhs in the future, it would be unfair to recover these costs from our initial 500 to 5,000 customers.

So, we modelled a five-year steep growth and a steady state annual operating growth of 15 per cent. This Inflation-led growth would be the likely operating cost. That led us to set the lending rate at 25.5 per cent in comparison to a market rate of 35 to 45 per cent. Our lending rate comprises cost of fund at 13 per cent from the banks, 7.5 per cent was the projected steady-state operating expenses, 2 per cent delinquency and a spread of 3 pc. 

In 2011, RBI decided to regulate the micro finance industry, when they capped the lending rate at 26 per cent. So, four years after what we had been doing, RBI set the benchmark. Incidentally, the YH Malegam committee, set up by RBI at that time met a lot of people to understand the market and set the regulatory framework. I was also one of the people they met. I gave a set of recommendations based on the model that we had been carrying out. There were 11 recommendations of the committee, which reflected exactly what we had been doing.

But a month ago, a Rs 10 lakh penalty was levied on the Bank. We were distributing insurance, mutual funds and third-party products. As per RBI guidelines, we had to take prior-approval for distribution of the financial products. But, we had not. It was a genuine slip. Our internal regulatory compliance inspections made us realise we had not met the guidelines. So, we admitted the governance slip to the RBI and still managed to get the approval. A fine of Rs 10 lakh had to be coughed up. 

After the AP microfinance crisis in 2010, we diversified our book – 70 per cent other loans and 30 per cent microfinance loans. To ensure that no product is the lone significant contributor, we dispersed and diversified our portfolio. One of the restrictions concerning the functioning of a bank is with regard to promoter holding. 

As per RBI, a promoter of a bank, after 5 years, cannot own more than 15 per cent stake in it. We have rolled out our entire liability structure in such a way that 50 per cent is through funded deposits and we have a broader asset base today compared to the past. We have rolled out more products like working capital loans for the small companies. We are not in the corporate lending space. As per small finance bank operations, we are mandated to keep 50 per cent of the loan less than Rs 25 lakh and secondly, 75 per cent of my loans should be priority based – SMEs, small traders agricultural and education. 

We understand the informal economy customers very well – the tea stall owners, petrol bunks, small restaurants, small workshops, provisions stores or auto mechanics. Our ability is to assess the cash flow and understand the ability to repay – a skill that not many banks have. 

As per the Centre’s NSSO survey 2013, 96 per cent of the funding required by such small units are not serviced at all. A majority of our own customers are first time borrowers from a formal institution. Equitas currently has a presence in 13 states. We have 375 branches with TN having 30 per cent of the branches. The width of our operation has expanded. Need for branding is something that we foresee. An ability to raise deposits as a bank needs branding effort, which as an NBFC we did not have. 

The work culture you set becomes the culture of the organisation. We have about 500 asset branches and 375 liability branches and have a staff strength of 13,000. Our inhouse tech development centre employs around 30 staff members as we believe technology is going to be the driver. We accept deposits of customers from middle and higher income groups and are able to disburse it as loans to members of the lower-income segment. The quantum of deposits I can mobilise from the borrower community is hardly about 10 to 15 per cent of my total deposit requirement. 

A major chunk of our work lives is spent engaging with members of the community who haven’t had the opportunity to get onboard the banking bandwagon until now. We now have a model to assess the income generating potential of borrowers who haven’t yet maintained profit and loss accounts. Our aim is to enable them with financial independence irrespective of the nature of their trade.