Deep understanding of mass market - serving unserved and underserved segments:
Ujjivan is a Small Finance Bank(SFB) providing a variety of banking services in mass market customer segments with a focus on serving the financially unserved and underserved segments in India. A large section of the Indian population lacks access to formal banking services or is served by informal providers. Accordingly, financial inclusion has always been a key priority for the Indian government. The banking system and ‘priority sector’ lending have been the most explored channels to bring majority of the population under the ambit of formal credit institutions. Financial inclusion is a comprehensive exercise that constitutes several products and services, such as bank accounts, insurance facilities, payment and remittance mechanisms, financial counselling, and most crucially, affordable credit. The RBI granted ‘small finance banks’ licenses in 2015 with the objective of making banking services accessible and affordable to the unserved and underserved segments through saving instruments, and providing credit to small business units, small and marginal farmers, micro and small industries, and other unorganised sector entities (Source: CRISIL). Ujjivan’s SFB operations are focused on serving the financially unserved and underserved segments in India. As of June 30, 2019, it operated 181 Banking Outlets located in 78 districts classified by the RBI as under-banked districts as per the Census 2011.
Ujjivan SFB continues to focus on lending to micro banking customers with deposits from its micro banking customers constituting 6.83% of its total deposits as of June 30, 2019. The bank is particularly focused on serving senior citizens and offers them differential interest rates, doorstep banking services, unlimited free ATM transactions along with free accidental insurance cover of up to Rs. 100,000 and no minimum balance maintenance requirements in savings accounts. The bank also offers such customers with priority service and life event-based services at its Banking Outlets. The bank undertakes constant research on various segments within the mass market to understand the financing requirements of potential customers and accordingly, is able to customize and develop products and services to address their needs. For instance, the bank has introduced a differentiated current account product for traders, overdraft facility for MSEs, loans for agriculture and allied activities, corporate internet banking for non-individual customers with current accounts and fund transfers in an open loop system through UPI.
Customer centric organization with multiple delivery channels: Ujjivan SFB served 4.72 million customers as of June 30, 2019, and considers its customers to be the most significant stakeholders at the core of its operations. It believes that customers prefer one source for multiple financial products and services and that its spectrum of products and services and allocating each customer with a relationship officer helps in customer acquisition and retention. It launched “Sampoorna Banking” in April 2019 that extends full banking services including education loans, vehicle loans, deposits; funds transfer facilities and distribution of insurance to families of its existing micro banking customers. On the liability side, it offers a variety of demand deposits and other services so that its customers can realise their savings goals. It is authorized to run Aadhaar Enrolment Centres (“AECs”) where customers and members of the general public can enrol for Aadhaar or get their Aadhaar data updated. To constantly assess its customers’ requirements and feedback for the introduction of new products, it has a dedicated service quality department to focus on customer retention, customer protection and grievance redressal. Customer satisfaction scores of its Banking Outlets have improved from 77.11% in Fiscal 2018 to 78.53% in Fiscal 2019. It has partnered with its Group Company, Parinaam Foundation for formulation and implementation of financial literacy programs such as Diksha+. It continues to support the Parinaam Foundation with its initiatives that aid in raising the level of financial awareness of its customers and as of June 30, 2019, Parinaam Foundation had covered over a million customers through various programmes. Besides its Banking Outlets and Asset Centres, its delivery channels also include ATMs, ARCs, mobile and internet banking services. As of June 30, 2019, it had a network of 387 ATMs that accept RuPay, Visa and MasterCard. As of June 30, 2019, its two 24/7 phone banking units based in Bengaluru and Pune service customers in 11 languages while its mobile banking application is accessible in five languages. It offers ‘missed call’ and SMS banking services. In Fiscal 2019, it witnessed significant growth in its phone banking, ‘missed call’ and SMS banking volumes. Its “Digi-buddy” service, offered by a dedicated and specifically trained employee at certain of its Banking Outlets, aims at assisting and educating customers on the use of various digital platforms and enables it to move from an assisted model to a self-service delivery model. Its customer focused approach has been widely recognized in the industry and is evident from the awards received. In 2019, it received the 6th SMEs Excellence Award for ‘Excellent Service (Small Finance Bank)’ from ASSOCHAM India, and was awarded ‘Best HR Practice in Finance Sector’ at the Banking, Financial Services and Insurance Awards.
Technology driven operating model with advanced digital platform: Ujjivan SFB leverages technology to serve its customers better, identify opportunities, and deliver innovative products and services and advance on its goal of facilitating financial inclusion in India. Ujjivan SFB manages the entire life cycle of customers’ banking transactions, from on-boarding to customer management, through its various technology platforms. Over the years, its use of technology has improved work place engagement and governance, increased the accessibility of its products to customers and enabled it to rapidly scale up its operations in a secure and efficient manner. The numbers of banking transactions through its digital channels were 0.60% and 8.31% of its overall transactions in Fiscal 2018 and 2019, respectively and such transactions accounted for 16.34% of overall transactions in the three months ended June 30, 2019. Ujjivan SFB aims to encourage and empower customers to conduct their banking operations through digital channels including through internet, phone and mobile banking. With its digital platform, Ujjivan SFB has enabled paperless and handheld device based loan origination and cashless disbursements for its customers with remittances directly to its accounts. Since commencement of its banking operations, 82.34% of advances have originated through handheld devices. Processing of loans is digitized and loans can be approved within minimal time post sourcing. Its use of handheld devices has reduced turnaround time to service customers. Turn-around time in group loans has reduced from 8.00 days in Fiscal 2017 to 4.06 days in Fiscal 2019. In Fiscal 2019, Ujjivan SFB enabled UPI on digital platforms. Customers are able to register savings bank accounts on mobile applications to perform financial and non-financial transactions. Ujjivan SFB also provides customers the ability to repay loans in a cashless manner and through digital wallets and payment gateways. Ujjivan SFB’s mobile application, ‘Ujjivan Mobile Banking’, had a customer rating of 4.6/5 on the Google Playstore as of June 30, 2019. In Fiscal 2019, the application was downloaded by 0.21 million users and was used by 0.19 million customers to perform banking transactions.
Robust risk management framework: The bank’s risk management framework is driven actively by the Board and management committee. USFB has implemented SaaS for measuring capital adequacy, asset liability management and preventing money laundering. As of September 30, 2019, the gross NPAs accounted for 0.85% of the gross advances, while the net NPAs accounted for 0.33% of the Net Advances. The Bank’s GNPA was the lowest among the small finance banks in India, as of March 31, 2019 (Source: CRISIL). Bank’s effective risk management framework is also evident from its low portfolio at risk ratio that has been consistently declining since inception and was 1.49% and 1.64% as of March 31, 2019 and September 30, 2019, respectively.
Professional management, experienced leadership with focus on employee welfare: Ujjivan SFB is professionally managed and its senior management team has a diversified track record in the financial services industry. Its Board consists of Directors with a diverse mix of experience in various sectors, in particular, the financial services industry and technology. Its employee base has grown to 16,776 employees as of September 30, 2019 (Source: Company, CRISIL, RHP).
SMALL FINANCE BANKING INDUSTRY
In order to promote financial inclusion, the Indian banking industry has seen several changes in recent years. NBFCs such as Bandhan and IDFC, received permission to set up universal banks. Further, a few microfinance companies, one local area bank and an NBFC received permission to set up small finance banks SFBs. SFBs are allowed to take deposits, which provide them an edge of having lower cost of funds in comparison with NBFCs. MFIs turned into SFBs are now diversifying its advances mix, and focusing on other retail and corporate lending business.
Evolution of SFBs
Despite various measures taken by the Government to increase financial penetration in India, a significant percentage of India’s population does not have access to basic financial services. In 2013, the RBI constituted a committee that recommended differential licensing in the form of payment bank and SFB. Accordingly, on November 27, 2014, the RBI released guidelines for a new class of banking entity, ‘small finance banks’, to cater to the diverse needs of the low income group. Further, on September 16, 2015, the RBI awarded SFB licenses to 10 players on account of the Government’s focus towards financial inclusion and inclusive banking. Out of the 10 SFBs, there were eight microfinance players, one local area bank and one NBFC. The objective of SFB’s is to extend banking services to the underserved and unserved population through savings instruments, and providing credit to small business units, small and marginal farmers, micro and small industries, and other unorganized sector entities. The operations of SFBs are technologically driven in order to reduce the cost of operations and also ensure faster reach to the untapped market. According to World Bank’s Global Findex Database 2017, India’s financial inclusion level has improved significantly with the adult population’s bank accounts rising from 53% in 2014 to 80% in 2017 on account of various Government initiatives, institution support and increase in usage of mobile phones as a medium for distributing financial services. As per CRISIL Inclusix, the index that measures the financial inclusion across 666 districts in India, reported a financial inclusion score of 58.0 in Fiscal 2016, having increased from a score of 50.1 and 35.4 in 2013 and 2009, respectively. The overall improvement of the financial inclusion score is primarily driven the ‘JAM’ trinity, i.e. Jan Dhan Yojana, Aadhaar and Mobile. Technology improvements help in financial penetration; however, the primary challenge for SFBs is still the ability to generate low cost deposits. While there exists a significant opportunity, SFBs will need to innovative further in terms of introducing customized and flexible offerings to target the untapped market and move toward becoming universal banks (Source: Company, CRISIL).Peer Comparison:
|Companies||Yield||NIM||COB||Cost to Income||PCR||GNPA||ROE||ROA|
Source: Company, CRISIL
Geographical concentration acts as risk:While Ujjivan’s operations are spread out in all four zones of the country, a large number of its Banking Outlets are located in the southern and eastern states of India, particularly, Karnataka, Tamil Nadu and West Bengal. Consequently, a majority of its advances are from customers in these states. As of March 31, 2019 and June 30, 2019, 45.01% and 45.21%, respectively, of its Gross Advances (including securitization/ IBPC) were contributed by these states. In the event of a regional slowdown in the economic activity in Karnataka, Tamil Nadu or West Bengal, or any other developments including political unrest, disruption or sustained economic downturn in these regions that make its products in these states less beneficial, Ujjivan SFB may experience an adverse impact on its financial condition and results of operations, which are largely dependent on the performance, geo-political and other prevailing conditions affecting the economies of these states.
Over dependence on Micro banking business:Ujjivan’s loan portfolio contains significant advances towards micro banking segment, particularly through group loans. As of March 31, 2017, 2018, 2019 and June 30, 2019, advances in micro banking business accounted for 97.50%, 92.55%, 84.67% and 81.97%, respectively, of its total Gross Advances (including securitization/ IBPC). As of March 31, 2017, 2018, 2019 and June 30, 2019, the percentage of micro banking gross NPAs to total micro banking advances was 0.29%, 3.90%, 0.85% and 0.73%, respectively. Consequently, the financial performance of Ujjivan SFB significantly depends on micro banking business, which in turn depends on various factors, including the ability of borrowers to repay their loan, the results of operations of such borrowers and its business, changes in regulations and policies, natural disasters, calamities, political and social risks, including any adverse publicity or litigation relating to the microfinance sector (such as a public interest litigation filed against all microfinance institutions in Maharashtra), public criticism of the microfinance sector and religious beliefs relating to loans and interest payments.
Ujjivan Small Finance Bank Limited (“Ujjivan SFB”) is a mass market focused SFB in India, catering to unserved and underserved segments and committed to building financial inclusion in the country. The Bank Promoter, Ujjivan Financial Services Limited (“UFSL”) commenced operations as an NBFC in 2005 with the mission to provide a full range of financial services to the ‘economically active poor’ who were not adequately served by financial institutions. UFSL’s erstwhile business was primarily based on the joint liability group-lending model for providing collateral free, small ticket-size loans to economically active poor women. UFSL also offered individual loans to Micro and Small Enterprises (“MSEs”) and adopted an integrated approach to lending, which combined a customer touchpoint similar to microfinance, with the technology infrastructure and related back-end support functions similar to that of a retail bank.
In the short span of time that Ujjivan SFB has been operational as an SFB, it is among the leading SFBs in India in terms of deposits, advances, branch count and geographical spread, as of March 31, 2019. Among the leading SFBs in India, Ujjivan SFB had the most diversified portfolio, spread across 24 states and union territories as of March 31, 2019 (Source: CRISIL).
As of September 30, 2019, Ujjivan SFB served 4.94 million customers and operated from 552 Banking Outlets that included 141 Banking Outlets in Unbanked Rural Centres (“URCs”) (of which 7 were business correspondent centres) and additionally operated 4 Asset Centres. In Fiscal 2019 alone, it operationalized 287 Banking Outlets.
As of September 30, 2019, Ujjivan SFB had a network of 441 ATMs (including 18 ACRs), two 24/7 phone banking units based in Bengaluru and Pune that service customers in 11 languages, and a mobile banking application that is accessible in 5 languages as well as internet banking facility for individual and corporate customers.
Ujjivan SFB’s portfolio of products and services includes various asset and liability products and services. Its asset products comprise loans to the micro banking customers that include group loans and individual loans,
On the liability side, Ujjivan SFB offers savings accounts, current accounts and a variety of deposit accounts. In addition, it also provides non-credit offerings comprising ATM-cum-debit cards, Aadhaar enrolment services; distribute third party insurance products and point of sales (“POS”) terminals. Ujjivan SFB offers its customers with various digital platforms including internet banking, mobile banking, SMS banking, bill payments, biometric ATMs and RuPay Platinum debit cards. Its customers are also able to register savings bank accounts on UPI based mobile applications. It also provides customers the ability to repay loans in a cashless manner through digital wallets and payment gateways.
Ujjivan SFB has partnered with Parinaam Foundation, its Group Company, for the formulation and implementation of financial literacy programs such as Diksha+, which aides in raising the level of financial awareness of its customers.
Ujjivan SFB intends to reduce its costs, increase operating efficiencies and move its customers from an assisted mode to a self-service mode of digital and phone banking. It will selectively operationalize additional Banking Outlets, convert its existing Asset Centres to Banking Outlets, expand the ATM and ACR network and engage more business correspondent agents to grow its customer base and increase the advances and deposits (Source: Company).
|Particulars (INR mn)||FY17||FY18||FY19|
|Gross AUM Growth (%)||0.00%||5.00%||30.00%|
|Disbursement Growth (%)||0.00%||765.00%||38.00%|
|Revenue from Operations||2170.00||14678.00||18316.00|
|Net Interest Income||1076.00||8609.00||11064.00|
|Opex / AUM (%)||7.92%||7.26%||8.57%|
|Cost to Income Ratio||95.35%||67.13%||76.43%|
|Profit before tax||0.00||68.00||1992.00|
|Profit/loss brought forward||0.00||0.00||52.00|
|Profit for the period||0.35||68.69||2043.91|
|Return on Annual Average Gross AUM Portfolio||0.00%||0.08%||1.72%|
|Return on Annual Average Net Worth||0.02%||0.42%||11.49%|
|Net Asset value per equity share||11.39||11.44||12.64|
|Yield and Cost of funds|
|Annual Average Yield on Gross AUM (%)||18.73%||19.66%||18.66%|
|Quarterly Average Yield on Disbursement (%)||25.80%||25.10%||24.30%|
|Annual Average Cost of Borrowings (%)||10.31%||9.78%||9.18%|
|Total number of Employees||10167.00||11242.00||14752.00|
|Gross Advances per employee (In million)||6.28||6.73||7.49|
|Total accounts (In million)||3.97||4.47||7.46|
|Disbursement per Outlets (In million)||20.42||173.97||212.04|
|Disbursement per employee||0.92||7.18||7.53|
|Deposit per employee||0.20||3.36||5.00|
|Deposit per Outlets (In million)||4.52||81.30||140.83|
USFB has good growth rates in last 2 years of its operations; we believe the growth momentum to be continued. USFB carries portfolio concentration risk with MFI loans of more than 79%, which has its own risks. Keeping this in mind USFB has gradually diversified among other products. At upper price band of Rs. 37 the stock is valued at 2.9x P/BV as on FY19, which seems little expensive compared to other peers. USFB has best in class asset quality ratios and higher RoE and RoA among peers. In a mix it is a good issue to SUBSCRIBE with long term perspective.
Use of Proceeds:
Augmenting the Bank's Tier 1 capital to meet capital requirements.
Book running lead managers:
Kotak capital, IIFL, JM Financial
Mr, Samit Ghosh and Mr. Nitin Chugh