A customer holds Indian rupee banknotes (Photographer: Dhiraj Singh/Bloomberg)

Small Finance Banks Go Beyond Interest Rates To Attract Customers 

An increasing demand for credit amidst weak growth in deposits is likely to intensify the struggle for India’s small finance banks. These banks, which have transformed themselves from microlenders to deposit-taking entities over the last few years, will need to go beyond just interest rates as they try to build their retail liabilities franchise and reduce their cost of funds.

In the early days of launch, most small finance banks chose to offer higher interest rates to lure customers.

AU Small Finance Bank, Equitas Small Finance Bank and Ujjivan Small Finance Bank offer average savings rates between 4.5 percent and 6.5 percent, according to Nomura. That’s on a par or higher than private lenders such as Bandhan Bank, RBL Bank Ltd., Kotak Mahindra Bank Ltd. and YES Bank Ltd. On term deposits, most small finance banks are offering at least a percentage point higher than large lenders.

The rate strategy has helped these banks make some early progress in garnering low cost current account and savings account (CASA) deposits and term deposits.

Equitas Small Finance Bank has been among the most successful with a CASA ratio of 30 percent. For AU Small Finance Bank and Ujjivan Small Finance Bank, low cost deposits make up 24 percent and 10 percent respectively.

However, to strengthen their deposit base further, these lenders which cater to small retail and business borrowers, are now focusing on branch expansion and are going beyond their traditional customer base.

“AU Bank registered a continuous growth in CASA deposits in the first 21 months as a bank. The key factor was our conscious efforts towards a customer-centric approach instead of a product-centric approach while also customising our products,” said Sumit Madan, chief of branch banking at AU Small Finance Bank. The lender, Madan said, is now looking at introducing digital services to acquire new customers, besides expanding the branch network to unbanked locations.

In seeking deposits from their loan customers, small finance banks have to contend with the restrictions of the rural market where disposable incomes are often low and spare funds to park in deposits are sparse.

To counter this disadvantage, Ujjivan is willing to look at urban and semi-urban customers to build its deposit base.

Ittira Davis, managing director and chief executive officer of Ujjivan Financial Services, said the lender is also looking to tap the urban and semi-urban areas to increase its deposit base. “Bigger banks have the flexibility, they are already established. We will aim for 20-25 percent CASA ratio in two to three years of operations.”

The battle for deposits being fought by small finance banks is not just against traditional lenders, which may have already made inroads into the rural markets. The fight, as Samit Ghosh, founder of Ujjivan Financial explained, is also to convert savings held by small rural or semi-urban customers in cash and in chit funds.

“We will focus on microfinance lending and open salary accounts for lower middle-class customers, lower level of businesses and institutions and mid-sized companies, besides offering them personal loans,” Ghosh said. “The intent would be to convert the savings of this class, which is kept in cash and chit funds, into our deposits.”

Small Finance Banks have made good progress with deposits accounting for more than half of their borrowings as on December 31, 2018, said rating agency ICRA in a note in March. The agency, however, added that most of these deposits are bulk deposits/certificates of deposit as the retail deposit franchise will take time to build.

“Although Small Finance Banks are eligible for additional liquidity support including interbank limits and have access to the call money markets like other scheduled commercial banks (SCBs), these factors at best support the near-term liquidity position of SFBs. Therefore, enhancement of retail deposit franchise would be a key success factor from a long-term perspective,” ICRA added.