K Paul Thomas: ‘Quality of corporate governance in enforcing credit standards relevant’

We believe the Indian banking system is one of the safest in the world. The safety arises out of the following factors … competent regulation and supervision, enforcement of prudential risk norms and maintenance of adequate liquidity positions. These are very important.

Do you think there is a case for further tightening in credit standards?

We believe that the credit standards used by banks in India are excellent. However, what matters is as to how they are actually applied by individual banks. What may actually bear more relevance today is improving the quality of corporate governance in enforcing credit standards and other parameters.

Do you see further decline in interest rates as the RBI has pressed the pause button in its last two monetary policies?

I believe that reduction in interest rate will be a catalyst for economic growth. RBI (Reserve Bank of India) has been reducing the repo rate consistently over a period but pressed a pause in the last two monetary policies. I believe that introduction of initiatives like long term repo windows and exemptions in maintenance of CRR to specific sectors will translate into reduction of interest rates. We are already beginning to see the positive effects of this on the economy.

How do you manage the spread and risk as your bank’s interest rates are higher when compared to the banking industry?

Most of the small finance banks have emerged out of microfinance moorings. The new role in the financial space has provided these institutions with access to low cost retail funds.

This new source has reduced the cost of funds to a larger extent. We are competitive both in deposit and advance segments. For lending, pricing is influenced by the sector to which it belongs — priority or non-priority — and the tenure of the loan … short term or long term.

Do you think there’s a case for the RBI to relax regulations for small finance banks?

It’s been around three years since small finance banks (SFBs) started operations. The authorities must have been happy with the performance of the banks so far, which resulted in the decision of providing on-tap licensing for SFBs. Business trends and the need for specific changes are just emerging.

I believe that RBI will study them in detail and take appropriate measures.

You’re focusing on the microfinance segment in a big way. How do you manage your delinquency levels?

Connects on the ground and strong community relationships have helped us create a healthy portfolio. We believe our business correspondents’ constant engagement with our microfinance customers leads to a lower risk of delinquencies.

If your delinquency levels are low, why charge high interest rates from borrowers?

The interest rates on our microfinance loans are fixed. Interest rates on new microfinance loans with a tenure of less than three years are fixed based on our marginal cost of funds based lending rate (MCLR), which is approved by our assets liability committee on a monthly basis.

How are you planning to bring down the promoter holding as required by the RBI’s regulations?

We have not taken any concrete decision in this regard as of now. The promoters’ stake has to be bought down as per the RBI guidelines.