South Indian Bank Gears Up To Launch Digital Banking Unit, Looks To Tie Up With Fintech Aggregators

Private lender South Indian Bank is in the process of setting up its first digital banking unit (DBU) in Thrissur in Kerala as part of the government’s announcement to launch 75 such units by August 15, its MD and CEO Murali Ramakrishnan has said.

“We have been allotted Thrissur as our area for developing the DBU. We are progressing well there,” he told Inc42 in an exclusive interview wherein he outlined how the bank is charting out its digital plans in retail loans, small and medium enterprises (SME) segment, credit card relationships, co-lending, among others.

The concept of digital-only banks was unveiled by Finance Minister Nirmala Sitharaman in Budget 2022. Later, she said that 75 digital-only units of banks and non-banking finance companies (NBFCs) would be set up in 75 districts across the country.

The DBUs are a welcome move for the fintech ecosystem as they are expected to accelerate the delivery of financial products and improve access to finance for small businesses.

More DBUs May Come Up Basis How First One Shapes Up

DBUs are aimed at improving the ease of doing business. They also enable customers to have a good touch and feel of doing transactions digitally. It is a great initiative to go in for financial inclusion because digital is the future.

While noting that penetration in the rural areas remains low even after so many years of operations of banks and NBFCs, Ramakrishnan said that banking is moving towards digitisation. The more the digital banking is taken to Tier-II, III, IV towns, etc., the more will be the penetration, especially when it comes to financing.

“I think people are definitely getting warmed up to the fact that they can avail of services through mobile as a medium. So, in order to nudge the customers into doing more and more mobile and digital, DBU as a concept is great, I think.”

Even before setting up the DBU, the South Indian Bank (SIB) went in for two completely digital branches, one in Bengaluru, which is already up and running, and the other one in Ernakulam in Kerala .

“As a concept, it’s picked up quite well. I think this will definitely build up into a bigger thing later. Basis how the first DBU shapes up and what kind of experiences we are getting from there and if the experiment is really worthy of repeating, we will definitely go in for more and more such units,” he said.

Tie-Ups With Fintech Companies For Scaling Up

SIB has been investing in technology over the last few years as it lays emphasis on digital initiatives. “We are definitely making in-house capabilities in many areas. We are also looking at whether we can have fintech aggregators, with whom we can partner for scaling up,” Ramakrishnan said.

SIB enjoys a good network presence in rural south India, especially Tamil Nadu and Kerala. It has exposure to all verticals, including corporates and SMEs. Its retail portfolio comprises home loans, loan against property (LAP), personal loans, credit cards, and of course, gold loans.

As the bank increases its focus on digital operations, it has started using credit models, basically using data science, for underwriting.  “We have developed different models for both home loans, LAPs and personal loans. We are using credit models for doing underwriting. Similarly, for onboarding retail cases, we are going in for a platform produced by Nucleus Software Exports. Basically, we’ll be using the platform of Nucleus for onboarding the entire loan journey, from sourcing till collection and recovery.”

This project is a work in progress and the bank is aiming to commission this over the next 2-3 months.

“It gives us a lot of flexibility in bringing everything, doing everything digitally. Right from CRM to loan origination system to loan processing to onboarding using fraud (detection) techniques, using credit underwriting techniques, everything can be integrated into the platform through APIs and we can interact digitally on the retail side,” Ramakrishnan said.

Digitisation Of Credit Card Business

SIB has tied up with a fintech company, FPL Technologies, for credit card relationships. The entire fulfilment happens through mobile phones. FPL runs an app and potential customers are sourced through it.  Every credit card applicant is run past the CIBIL cleanup. The applications of eligible customers, based on the risk appetite the lender has defined, are then processed for giving a credit card.

“We have seen a good ramp up happening. We started this sometime in September last year. And as I’m talking to you, already close to 60,000 credit card issuances are there. The entire fulfilment of this happens digitally,” Ramakrishnan said.

Expanding Digital Footprint 

On the SMEs side, the bank has gone in for a credit model built up using McKinsey‘s help. The lender has developed a model which will be used for underwriting the lower end of SMEs. 

In lower end of SMEs — those with turnover of up to INR 100 Cr — the average ticket size could be about INR 1 crore and in the higher end of SMEs — those with turnover between INR 100 Cr and INR 250 Cr — the bank has an average ticket size of INR 8-9 Cr.

“For the lower end, especially those which behave more like retail, we are going in for a great model for underwriting and there again we are going in for SME platform on which the entire loan process will be uploaded.”

He added that “even in areas like supply-chain financing, we are going for a wider platform using which we have now started scaling up that business”.

Similarly, the treasury operations will also see new systems soon. Latest digital technologies are being introduced to enhance customer convenience, ease of processing, reduce the turnaround time and improve quality.

“Once you use a model, you can continue to keep evaluating the model’s performance and we can keep fine tuning depending on the risk appetite. So that way we are trying to bring everything into digital,” he said.

Close To 93% Of SIB Transactions Happen Digitally

Ramakrishnan said that the bank’s multilingual mobile app SIB Mirror+ is also loaded with “good” features. A tool called E-locker allows customers to set the limit for transactions. A customer can unlock this and increase or decrease the transaction limit and lock it again. 

“We are constantly working to keep on improvising the app. We also constantly push through our distribution teams to nudge the customer into making more and more internet and mobile transactions. Close to 93% of our transactions happen digitally,” he said.

Evaluating Co-Lending Options

SIB is also talking with a few NBFCs for co-lending, which again will be done through a platform. “We are in discussion with one of the leading platform providers for co-lending and while that effort is on, we are also talking to many NBFCs with whom we would want to have a tie-up.”

For gold loans, SIB has gone in for a tie-up with Rupeek. It is looking at partners in gold loan, personal loan, SMEs, among other segments,  for co-lending opportunities.

In co-lending, the risk appetite is defined by the major partner. So typically co-lending works with a 75-25 or 80-20 kind of arrangement where 80% of the exposure is taken by the major lender and 20% by the minor lender.

Sourcing is done by the NBFC or the minor lender and the risk appetite is defined by the major lender. So, the major lender defines the norms through which the underwriting happens.

“We can have a variety of relationships over there, the entity can be boarded into a platform, which can do the entire monitoring, onboarding, monitoring, collection reviews, everything can happen through a platform,” Ramakrishnan said.

The other way is having a parallel setup in the bank’s own core banking setup where it has the ability to do any kind of slicing and dicing with the data available.

To a large extent co-lending is a supplementary business to the bank’s own business. SIB is big in gold loans. Ramakrishnan said that on any given day, the bank gives INR 35-40 crore of loans. It has more than INR 10,000 Cr of gold loans on its books. The bank has an extensive presence in southern markets with more than two-thirds of its branches in the region where gold loans are popular, particularly in Tamil Nadu or Kerala.

“We are very well entrenched in this market. But even then, when we are looking for co-lending partners…It’s basically to supplement some more businesses come in through such partners provided the partners are in sync with the kind of risk appetite, the practices, the do’s and don’ts… Once there is a clear agreement there, then we will be happy to partner with them,” Ramakrishnan said.

SIB in its credit card relationship has FLDG (First Loss Default Guarantee) arrangement. Such an arrangement makes the co-lending partner continuously monitor their portfolio and beef up collections so that it doesn’t slip into a bad book. There will also be common reviews which will keep happening about credit quality, customer profiles, customer behaviour, etc. 

SIB views co-lending as just another channel to source business. It doesn’t see co-lending forming a big part of its portfolio. With its proven strength of distribution, branch network, and 9,000-strong manpower, SIB will rather do business with its own setup and its own people so that the skills also get built in the team. Besides, the bank knows its risk appetite better than anyone else, the CEO said.

“Since it’s a completely new concept in India, we will have to be cautious, we will see how it goes. And as we learn more and more from it, probably will be encouraged to look at it with more and more risk appetite. Currently, I would rather play it cautiously,” Ramakrishnan said.

Digital World Is An Equaliser

He further elaborated how the digital world offers equal opportunities to all, unlike physical branches which are not scalable. “You can’t go and set up, let’s say branches, like what may be HDFCs of the world have or SBIs of the world have, they got so many branch networks across the country (sic).” 

In that model the small will always remain small, the big will always remain big. Whereas these kinds of digital initiatives will actually become a great equaliser, he added.

“Because today in digital capabilities, I can be as good as the best in the country, depends on how I am putting things together. And if I have my controls and checks properly aligned, I can give a run for money to the largest banks in the country. So that way it has become a big equaliser,” Ramakrishnan said.

He said he sees digitisation as a force which can’t be stopped. The way organisations adapt to it will decide if they will survive or thrive in the ecosystem. 

‘Too Much Regulations Will Kill Creativity’

When asked about the key role played by the regulators in the digital space, he said regulations have to go in tandem with the progress being made, like in any other space.

“We can’t let things go deep without regulations being there. At the same time, if too much regulations are put right up front, then creativity and the whole thing will get killed in the early stage itself,” Ramakrishnan said.

Commenting on shady operators in the digital lending space and the need to regulate them, he said regulations might start putting some threshold criteria, which will eliminate people who are not very well qualified to do that.

He also sounded confident that more regulatory reviews and inspections will happen on critical issues such as data privacy and customer secrecy.