Jana Small Finance Bank: Authorized Dealer Forex License, Loan Book & Deposit Growth | Ajay Kanwal

Summary

In this interview, Mr. Ajay Canal, MD and CEO of Jana Small Finance Bank, discusses the bank's recent RBI license grant, focusing on how it will enhance their MSME services, reduce costs, and introduce new products like prepaid Forex cards and foreign currency deposits. He also addresses the bank's strategic shift to secure loans, aiming for an 80% secured business mix by 2027, with notable progress already. Canal highlights improvements in loan recovery and provides insights into the bank's ongoing focus on financial stability, including their upcoming universal banking license application.

Takeaways

• 😀 The RBI has granted Jana Small Finance Bank a Category 1 Authorized Dealer license, which will enhance its ability to support MSMEs with services like Letter of Credit (LC), packing credit, and foreign exchange services.
• 😀 The new license will also enable the bank to expand its non-resident business and offer products such as prepaid Forex cards and FCNR deposits.
• 😀 Jana Small Finance Bank's MFI (Microfinance Institution) business stress has bottomed out, with challenges easing by Q2, and improvements expected in Q4 and Q1 onwards.
• 😀 The bank’s strategy is to increase the proportion of secured loans to 80%, up from 60% in March 2024 to 68% in December 2024, with steady progress toward this goal.
• 😀 While secured loans generally offer lower margins, the bank expects a limited impact on NIMs (Net Interest Margins) as it moves toward an 80% secured loan mix, estimating a 30 basis point drop in margins.
• 😀 The shift from unsecured to secured loans is being driven by the growing opportunity in affordable housing and micro-enterprise lending, particularly in property-backed loans, which are seen as more resilient in economic downturns.
• 😀 The bank has proactively reduced its unsecured book by 11% in 2024, reflecting a cautious approach to the MFI segment while it stabilizes.
• 😀 Jana Small Finance Bank has focused on recoveries, reporting 300 crores in recovery for Q3, and expects continuous recovery improvements in Q4, as the economic situation stabilizes.
• 😀 The bank's recovery efforts are significant, with customers from as far back as 2016 still making payments, contributing to meaningful recoveries.
• 😀 Jana Small Finance Bank is on track to apply for a Universal Banking License in May 2025, aiming for lower NPAs (Non-Performing Assets) and stronger financial stability, with a gross NPA of 2.7% and net NPA of 0.91% in December 2024.

Q & A

What recent development has Jana Small Finance Bank achieved, and how will it impact the business?

Jana Small Finance Bank has been granted an RBI license to act as an Authorized Dealer Category 1. This will enable the bank to offer services like Letters of Credit (LCs), packing credit, Foreign Currency Non-Resident (FCNR) deposits, prepaid Forex cards, and boost its non-resident business. It will also allow the bank to reduce costs for customers and introduce new products in previously underserved segments.

How has the MFI stress situation been handled by Jana Small Finance Bank?

The bank reported that the MFI stress peaked in Q2, but the situation has improved in Q3. The bank has already seen some stabilization and expects Q4 to be better, though not significantly. Going forward, they anticipate a steadier outlook in Q1 of the next fiscal year.

What is the current loan mix strategy of Jana Small Finance Bank?

Jana Small Finance Bank is focused on shifting its loan mix toward secured loans. The current mix is 68% secured loans, up from 60% in March 2024. The bank aims to reach 80% secured loans by March 2027, although this could happen earlier due to a recent decrease in the unsecured loan book.

What is the reason behind the bank's focus on secured loans?

The bank is focusing on secured loans to ensure a healthier asset book, especially since it is a public depositing institution. Secured loans, such as those backed by property, are seen as more resilient through economic cycles. This strategy is also in line with the bank’s aim to strengthen its financial stability.

How has Jana Small Finance Bank's unsecured loan book been performing?

The unsecured loan book has been decreasing, with a reported 11% drop as of December 2024. This reduction was not planned but was prompted by the challenges in the MFI business. The bank decided to step back and reassess the situation before moving forward.

What impact has the transition to more secured loans had on the bank’s Net Interest Margins (NIMs)?

As the bank shifts its loan mix from unsecured to secured loans, NIMs have decreased from 8% in March 2024 to 7.7% in December 2024. However, secured loans have maintained a stable NIM, and the decrease is largely attributed to the shift in the loan mix rather than a drop in secured loan margins.

What is the current state of recoveries at Jana Small Finance Bank?

Jana Small Finance Bank has been actively focusing on recoveries, reporting around INR 300 crore in recoveries in Q3 FY 25. Recoveries are expected to improve in Q4 FY 25, as the market conditions have stabilized and more customers are settling their outstanding balances.

What are the bank’s expectations regarding NPA (Non-Performing Assets) in Q4?

As of December 2024, the bank's gross NPA stood at 2.7% and net NPA at 0.91%. If the trend continues, the bank expects to maintain or potentially improve these figures in Q4, which will further enhance its eligibility for a Universal Banking License.

What is Jana Small Finance Bank’s plan regarding a Universal Banking License?

The bank plans to apply for a Universal Banking License in May 2025. If the current trend of improving NPA and recoveries continues, the bank will be eligible to apply for this license, though the decision will ultimately be in the hands of the regulators.

How does Jana Small Finance Bank view its role in financial inclusion?

Jana Small Finance Bank is committed to financial inclusion, particularly through its MFI business model. The bank serves underserved segments such as MSMEs and low-income households by offering affordable loans, including property-backed loans and microloans. The bank aims to balance financial inclusion with a focus on secured lending to ensure long-term sustainability.