Based on the speech by Samit Ghosh, Founder and CEO, Ujjivan Financial Services at Gnosis ’16, XLRI’s 7th Annual Finance Symposium.
Given the crisis-hit commercial banking sector, the burden of banking is now on the frail shoulders of small finance banks. Despite best efforts, India does not have Public Sector Banks which provide mass sector banking probably because of their own constraints of technology, structure among others and are hence not able to deliver. This big gap had to be tackled and thus, the idea of Ujjivan was born.
It was set up primarily with the mission of serving the unserved and undeserved and now has over 470 branches across the country. Recently former RBI Governor, Raghuram Rajan also promoted small finance banks and payment banks. This presents an opportunity to transform micro finance institutions into a truly mass market realm. Hence, micro finance institutions aim to have a model that would scale up and have national presence. Ujjivan has been successful in this regard with a footprint across 24 states and Union Territories of India. It has also managed to geographically diversify to manage risk when lending to poorer sections.
Ujjivan Financial Services started in micro finance by replicating the Grameen model of group lending as in Bangladesh. In the beginning, the loans were of small amounts ranging to about 10,000 rupees. Most customers of Ujjivan are self-employed and hence, use this loan to expand or scale up the business. They gradually move towards individual loans once their history or track record is clear. Such loans form about 87% of Ujjivan’s portfolio. This is evidenced by Ujjivan’s strong customer base of almost 3 million, with 70% being self-employed. A few years ago, it also started providing loans in the affordable housing and MSME. High growth is expected from the affordable and MSME sector and hence, Ujjivan aspires to have an equal proportion in both group lending as well as the affordable housing and MSME sector.
The concept of micro finance started internationally in Bangladesh and Latin America in the mid 1970s, while in India in mid 90s. It has had a fairly long history and gone through some tough phases. The micro finance industry faced a major stress test during the Andhra Pradesh microfinance crisis, and yet survived. An industry wide problem seen in commercial banking is the lack of information sharing, each preferring to work in individual silos instead. Hence, when there was a crisis in the micro finance industry, individual companies actually got together and formed an association. A move was taken towards self- discipline ourselves. It also started working with credit bureaus to provide credit information on customers. Today, no loans are given to any of the 40 million micro finance customers without a credit bureau report. There have also been regulations put in on credit ceiling, multiple lender ceiling, helping recovery. The recognition for such efforts was seen when out of the 10 licenses given for small finance banks by the RBI, 8 were awarded to micro finance institutions.
A core tenet of micro finance, especially as seen in Ujjivan is working on strict discipline and incorporating best credit principles. The risk in terms of credit in microfinance only comes in the form of external intervention. This happens when the government or other institution comes in and impacts the business resulting in a crisis, as seen in Andhra Pradesh. But if run in a disciplined manner, individual credit risk is very low as reflected in the portfolio quality of Ujjivan and other micro finance institutions.
The biggest challenge however, was not that of portfolio quality but of operating cost. The front end of micro finance i.e. acquiring and servicing customers, collecting was unique, but the back end was very archaic. At Ujjivan the front end and back end were fused together much like a modern retail banking pattern in term of technology, operations and service quality, marketing and risk management. It has led to decrease in the operating expense ratio from 31% to 7%. This success has also prompted other micro finance institutions to replicate the model.
Ujjivan earlier successfully raised capital through private placement 6 times. It has excellent investors ranging from developmental financial institutions to private equity. It also had a stellar IPO, being oversubscribed almost 41 times. This was indeed an accomplishment given the state of the banking industry at the time with NPAs piling up banks all around. The IPO was done mainly to reduce foreign ownership from over 90% to less than 50%, a requirement for the small finance bank license.
Ujjivan regards four stakeholders as most important- customers, staff, community and investors. It strives to serve all stakeholders equally without bias. Through its best practice it has assisted in the development of communities with poor infrastructure and supported its other stakeholders by turning a profit in the very first year itself. It also has an independent foundation, which works towards financial literacy in India especially for poor.
Through its successful transition to a small finance bank, Ujjivan aims to provide a full range of services, not limiting itself to only. The deposit base will also become more stable. Ujjivan believes in constant reinvention and innovation and is thus adopting fintech in every aspect of its business from account opening to routine customer transactions. The challenge faced however, is that people still do not accept branch-less banking, are stuck on traditional brick and mortar banks.