YES Bank, which is striving to fulfil PSL targets, intends to acquire a microfinance institution (MFI) in next 18 months and open 150 branches in semi-urban and rural areas by FY24.
In FY23, the bank added 83 new branches, bringing the total number of branches to 1,192, including 450 in semi-urban and rural areas. Lenders are obligated to pay money into rural infrastructure development funds (RIDF) to make up the difference if the aim is not met. The low-interest rates on RIDF money are a drag on deposits.
Addressing RIDF/PSL drag through organic and inorganic solutions, according to Prashant Kumar, managing director and chief executive officer of YES Bank, is one of the approaches to increase operational profitability. The goal is to increase penetration in growing rural markets and create a priority sector for agriculture.
This would be accomplished through a series of processes, including branch-based origination, co-lending, portfolio purchase from MFIs and acquisition of MFI business. Kumar stated that there is intent and that work has begun to obtain an MFI. He, on the other hand, avoided getting into specifics.
Several banks have acquired MFIs because such deals allow them to expand their operations in rural and semi-urban regions. Kotak Mahindra Bank announced the acquisition of Sonata Finance in February, with Rs 1,903 crore in assets under control. It has 900,000 customers and 502 branches in ten states.
Kumar stated that its deposits in RIDF were approximately Rs 30,000 crore, with returns that were lower than the cost of funds. The return on assets is dragged down by over 40 basis points.
The bank's priority sector exposure is 48 per cent, which exceeds the regulatory threshold of 40 per cent. However, the requirement for RIDF deposits arises when the lender fails to fulfil the target for a sub-category.
In the category of financing to small and marginal farmers, YES Bank falls short of the 10 per cent aim. It is currently around 1.5 per cent. It is a high need and the lender will originate loans for this category through branches. However, this will only meet a portion of the requirements.