‘Expect festival season spending to be strong’ – Banking & Finance News

Notwithstanding the ‘below normal’ monsoon, a strong Kharif harvest will boost spending during this festival season, said Rahul Shukla, group head, rural and commercial banking, HDFC Bank. In an interview with Ajay Ramanathan, he said that the microfinance sector is now largely driven by self-help groups and individual borrowers instead of joint liability groups.

The monsoon season has been ‘below normal’ this year. Do you see any impact on demand ahead of the festival season?

When monsoon is low, there is a lot of discussion on spatial distribution and long-period average. If you go back and look at the last 40 years, we have had droughts, monsoon failures, flash floods, and hail storms. But every year, grain production is increasing. So, you have to take that as an axiom that the grain production would be higher. I am not talking about the value but about the quantity. The rainfall reduction impacts the southern regions where there are no canals. Otherwise, there are irrigation systems in the north. This year, the Kharif crop is going to be pretty strong. With the harvest, farmer income is going to start coming in. My expectation is that festival season spending is going to be very strong.

Two-wheeler sales were down in July. But, there was ferocious rainfall in July. So, we cannot just look at one indicator. The next question is that if the reservoir water is not there, what is going to happen to the Rabi crop? I think there has been enough rainfall and moisture in the ground. We have to still assess the impact of the reservoir water level on the Rabi crop, which will start the winter crop season. That jury is out at this point of time. But, this Kharif crop cycle is going to power strong consumption in the rural segment during the festival season.

We often hear reports of various banks wanting to get into the microfinance segment via the inorganic route. What is your strategy?

Many people may feel that this is a high growth area and is profitable. But, we are very careful not to go out and overleverage these borrowers. It is important to consider the financial literacy component. We help borrowers in building a business, and enable them to do commerce. The bank’s track record is pretty good.

In the microfinance segment, there is an increasing shift towards individual loans from joint liability group (JLG). What is your assessment?

If you go back into the history of JLG, it started in Bangladesh. But as of today, India has outgrown JLG. There are around eight states where microfinance is pretty large. The remaining states constitute 23% of the market. It is predominantly driven by self-help groups and individual borrowers. Banks have a deeper comfort with self-help groups. If you are a microfinance institution that is doing a weekly collection, you can go into the high risk JLG segment, do a 25-30% and then do the collections. Banks normally do a monthly repayment cycle. Self-help groups are less risky and therefore, it plays to the strength of banks. For any bank, the cost of funding is low, and these self-help groups are established for decades, so we go out and support them. I think the shift has tilted towards self-help groups.

An increasing number of NBFCs are looking at small and medium-sized enterprise segment, especially in rural and semi-urban areas. How do you manage this competition?

Everybody has a niche. If you have 100 million entities, only 20 million are in the formal banking system. Those who go to non-banking financial companies (NBFCs) are borrowing at 14-17%. Those who are with banks borrow at below 10%. Small and medium-sized enterprises graduate with size. They naturally move from NBFCs to banks. When they grow, they may have export-import needs that NBFCs cannot meet. They may have some family wealth management issues that NBFCs may not be able to meet because you are taking the company for a listing, etc. By the end of this decade, at least 10,000 SMEs with a turnover Rs 100-200 crore would graduate to over Rs 2,000 crore.

That is the level of wealth creation that is happening in the country. Similarly, 1,000 mid-corporates that have a turnover of Rs 1,000-2,000 crore today will cross Rs 10,000 crore. We do not find competition as an issue. In fact, we focus more on districts where our market share is less than 5%. This year, we are doing a program as a strategy in commercial and rural banking of 1+1. That 1+1 is doubling our customer base. Whatever was our number of customers as of March 31, 2022, we are going to double it by March 31, 2024.