Last Updated on Apr 6, 2021 by Manonmayi

Folks, if you don’t know the difference between a bank and a small finance bank, now is a good time to update your knowledge trove. In this article, we’ll speak about Ujjivan Small Finance Bank (USFB) that recently offered IPO and got itself listed on BSE and NSE as per RBI’s requirements. By the way, Ujjivan Small Finance Bank received the highest IPO subscription in the year.

So, let’s start without further ado.

What is a small finance bank?

Unlike a mainstream bank, the objective of a small finance bank (SFB) is to address the issue of financial exclusion faced by the underserved sectors of the economy. To do this, an SFB offers basic banking facilities to the said sectors. It accepts deposits from and offers credit to micro banking customers.

What was the need to introduce a small finance bank?

Finance, being the blood of any business, is what helps it grow; a scarcity, on the other hand, means its doom. In India, MSME, agriculture, and unorganised sectors don’t enjoy the same access to financial services as big corporations do. This makes them ‘financially underserved sectors’ of the economy.

Despite the tag, the underserved sectors contribute significantly to the economy in terms of GVA, GDP, and employment opportunities. Take a look at how they contribute to the GVA.

Evidently, combined agriculture and MSME sectors add a GVA of 49.7% to the economy, which is impressive. But what about the financial facilities that they get? Rather meagre. That is why the government introduced a small finance bank: to help the underserved sectors function to their full potential and contribute to the economy.

Now, to get more insights on such a small finance bank, here are certain guidelines that apply to it:

  • The SFB should have been an existing entity operating as an NBFC, a microfinance institution or a local area bank.
  • The SFB can be promoted by individuals, trusts, corporates or societies, provided they have a 10-yr experience in the sector of banking and finance. Also, the promoters are required to have an initial stake of 40% in the paid-up equity capital, which must be diluted to 26% in 12 years.
  • The SFB should be established as a public limited company in the private sector under the Companies Act, 1956. The RBI Act, 1934, Banking Regulation Act, 1949 and other statutes govern the entity.
  • Its primary objective should essentially be to aid rural and semi-urban savings and offer credit for local economic activities.
  • An SFB should allocate 75% of the net credits to priority sector lending (such as agriculture and MSMEs),  50% of which must be in the range of Rs 25 lakh.
  • An SFB should start with a minimum capital of Rs. 100cr. As per the RBI guidelines, the bank is required to get listed within 3 years of reaching a Rs. 500cr-net worth. In contrast, a small finance bank with a net worth less than Rs. 500cr is not mandated but can do so voluntarily.

Now, let’s read about the hero of the article USFB.

History: Ujjivan Small Finance Bank

Here’s how USFB came into existence:

  • First established as ‘Ujjivan Financial Services Limited’ (UFSL), the NBFC began its operations in 2005. Even then, its mission was to improve financial inclusion within the country. Therefore, it offered financial services to the financially underserved sectors, which were not served by the mainstream financial institutions.
  • At the time, USFL operated in 209 districts across 24 states and union territories, and mainly offered collateral-free joint liability group small-ticket loans to women, individual loans to MSEs, and several other products.
  • On 7th Oct 2015, USFL received in-principle approval from RBI to establish a small finance bank named ‘Ujjivan Small Finance Bank Limited’, which would be its wholly-owned subsidiary. A year later, on 11th Nov 2016, RBI gave USFL the final license to operate as a small finance bank.
  • UFSL the transferred its business to USFB and commenced operations from 1st Feb 2017. Post this, as per RBI guidelines, UFSL applied to be registered as a Core Investment Company (NBFC-NDSI-CIC).
  • In 2019, Ujjivan announced its plan of going public

Products and services offered by USFB

Ujjivan SFB offers a range of products and services to its customer base, including:

  • Savings account
  • Current account
  • Recurring deposits (RD)
  • Fixed deposits (FD)
  • Micro loans
  • Individual loans  
  • Group loans
  • Small Business Loans
  • Home loans
  • Internet, phone, and mobile banking
  • Biometric-enabled ATM
  • POS terminals

Ujjivan Small Finance Bank IPO

As mentioned before, a small finance bank is required to get listed on reaching a net worth of Rs. 500cr. To meet this guideline, Ujjivan SFB declared its plan of going public. Ujjivan submitted DRHP seeking approval to IPO worth Rs. 1,200cr. It received SEBI’s approval for the same in the month of October.

 Here are the details of the IPO:

  • The IPO included a pre-IPO placement of Rs. 304 crore and a reservation for eligible equity shareholders to the tune of Rs. 120 crore
  • The Rs. 750cr-chunk of the IPO was open for subscription from 2nd Dec to 4th Dec 2019
  • It was managed by Kotak Mahindra Capital Company Limited, IIFL Securities Limited, and JM Financial Limited
  • Having a face value of Rs. 10, the IPO was offered for a premium of Rs. 26 to Rs. 27 at a price band from Rs. 36 to Rs. 37
  • The IPO also included shares reserved for the shareholders of USFL—the parent company—who were offered a discount of Rs. 2 per share on the price band
  • The IPO was available for subscription in a lot of 400 equity shares and multiples thereof
  • Ujjivan Small Finance Bank IPO was available for subscription as follows:
  1. 75% to qualified institutional buyers (QIB)
  2. Up to 15% to the non-institutional investors and
  3. Up to 10% to retail investors

Performance of the IPO

Just before the IPO, in its inspection of Ujjivan Small Finance Bank reported certain observations that were rather potential spoilers. In the inspection that RBI conducted between Jan to Feb 2018, RBI found out that:

  • USFB lacked a proper fraud management system and a sound rating methodology
  • The regulator of banks also brought forth other issues such as the absence of a system to categorise priority sector loans and a high share of bulk deposits
  • USFB offered loans from certain branches without RBI’s approval
  • Deficiencies in KYC and AML protocols
  • Absence of an independent compliance department
  • Different deposit interest rate offered on a particular date for the same tenor and amount
  • Interest rates mentioned in some sanction letters differed from the loan agreements

Despite these deficiencies, Ujjivan Small Finance Bank IPO was the highest subscribed among its peers in 2019. Here are some other interesting facts:

  • Ujjivan allotted the shares at Rs. 37
  • Compared to the issue price, the stock boasted a premium of ~60% after opening on the exchanges.
  • The IPO was oversubscribed by ~166 times and was listed on BSE and NSE on 12th Dec 2019
  • Assuming the higher price band of the shares, promoter and promoter group’s share in the capital reduced from 94.40% to 83.32%. On the other hand, public and employee’s share increased from 5.60% to 16.68%.

Each category of investors subscribed the chart below shows the number of times stated previously.

Why were investors eager to subscribe to the Ujjivan IPO?

Some reasons investors eagerly subscribed to Ujjivan are as follows:

  • The stock boasted attractive valuation and strong asset quality. At the time, Ujjivan had a PE of 16.5, half of AU SFB, its listed peer. In addition, Ujjivan’s PB at 2.3 was also attractive, given AU’s valuation of 6.9.
  • Ujjivan Small Finance Bank scores are high on various grounds including persistent growth in advances, sound capital, and diversified geographic presence.
  • The widespread existence of its parent company USFL in rural areas gives USFB an edge when it comes to offering services to PAN India.
  • Attractive financials were the other interesting aspect of the IPO. Here are the detailed charts:

Speaking of NPAs as of Sep 2019, Ujjivan’s gross NPAs to gross advances stood at 0.85% and net NPAs to net advances at 0.33%. The PAT also increased dramatically. While the PAT as restated for 2018 was Rs 6.86cr and for 2019 was Rs.199.22cr, for 6 months ended Sep 2019 alone, it was Rs. 187.11 cr.

Purpose of issuing the IPO

While the main objective to IPO was to comply with RBI’s norm of getting listed within 3 years of receiving a banking license, USFB also proposes to:

  • Use the net proceeds to add to its Tier – 1 capital for future capital requirements
  • Meet expenses associated with the issue
  • Shareholding and management

What’s happening with Ujjivan during recent times? 

After making a stellar debut on the stock exchanges, Ujjivan Small Finance Bank now as to elect a new independent director after Sachin Bansal resigned stepped down on 28th Jan 2020. Bansal, who is also Flipkart’s co-founder, now looks to venture into the financial sector via his wholly-owned Navi entity Technologies, which has applied for a banking license. He resigned citing this move would cause a conflict of interest, which he wanted to prevent. Surprisingly, this move didn’t make a significant impact on the stock.

Given the scope for small finance banks in India, Ujjivan can make it big by working on its issues and consistently meeting its objective of serving the underserved sectors.

Aradhana Gotur
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