Ujjivan Small Finance Bank Ltd

Industry

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).

Source: Company, CRISIL

Risks

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.

Company Description

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,

• Agriculture and allied loans,
• MSE loans,
• Affordable housing loans,
• Financial institutions group loans,
• Personal loans, and
• Vehicle 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).

Valuation

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.

Key Information:

Use of Proceeds:

Augmenting the Bank's Tier 1 capital to meet capital requirements.

Book running lead managers:
Kotak capital, IIFL, JM Financial

Management:
Mr, Samit Ghosh and Mr. Nitin Chugh