Suryoday Small Finance Bank coming with an IPO to raise Rs 582 crore

Suryoday Small Finance Bank

• Suryoday Small Finance Bank is coming out with a 100% book building; initial public offering (IPO) of 1,90,93,070 shares of Rs 10 each in a price band Rs 303-305 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on March 17, 2021 and will close on March 19, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 30.30 times of its face value on the lower side and 30.50 times on the higher side.
• Book running lead managers to the issue are Axis Capital, ICICI Securities, SBI Capital Markets and IIFL Securities.
• Compliance Officer for the issue is Geeta Krishnan.

Profile of the company

The bank was among the leading Small Finance Banks (SFBs) in India in terms of net interest margins, return on assets, yields and deposit growth and had the lowest cost-to-income ratio among SFBs in India in Fiscal 2020. It has for over a decade been serving customers in the unbanked and underbanked segments in India and promoting financial inclusion.

The bank commenced its microfinance operations in 2009 and has since expanded its operations across 13 states and union territories, as of December 31, 2020. As of December 31, 2020, its customer base was 1.44 million and its employee base comprised 4,770 employees and it operated 554 Banking Outlets including 153 Unbanked Rural Centres (URCs). It has set up 661 customer service points (CSPs) as additional service or touch points during April 1, 2020 and January 31, 2021 and intend to continue to expand its reach through the CSP model. Its delivery platform also includes partnering with business correspondents (BCs) for sourcing both asset and liability business and has expanded its network and presence through their reach to promote financial inclusion. It has arrangements with various payment banks in India and has been able to leverage its relationship with such payment banks to grow its deposit base. Its distribution network also comprises its ATMs, phone banking, mobile banking, tablet banking, unified payment interface, CSPs, and internet banking services.

The bank currently offers a variety of asset and liability products and services designed for inclusive finance and general banking customers. Its asset products consist of its inclusive finance portfolio (comprising loans to JLG customers), commercial vehicle loans, affordable housing loans, micro business loans, unsecured micro and small enterprise and small and medium enterprise loans, secured business loans, financial intermediary group loans and other loans. The bank has leveraged the use of technology across all aspects of its operations. In particular, it uses digital technology for customer acquisition and also customer lifecycle management. Its employees use tablets to service customers in the unbanked and underbanked segments which has led to greater customer convenience and improved operational efficiency. It also has a robust back-end operating system supported by its core banking system and document management system.

Proceed is being used for:

• Augmenting Bank’s Tier - 1 capital base to meet bank’s future capital requirements.
• Receiving the benefits of listing the equity shares on the stock exchanges.

Industry overview

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, local area banks and NBFCs have received permission to set up SFBs. SFBs are allowed to take deposits, which provide them an edge of having lower cost of funds in comparison with NBFCs. MFIs that have turned into SFBs are now diversifying their advances mix, and focusing on other retail and corporate lending business. To improve financial inclusion, especially in rural areas, the government is focusing on improving the overall and rural  infrastructure for penetration of financial services as well as empowering the development of parallel supporting institutions. This has provided an opportunity for small-finance banks and other financial institutions to cater to the unserved population or act as a channel between the larger financial institutions and other service providers to the underserved customers. The RBI has awarded SFB licenses to 10 institutions, which aim to service the underserved through savings instruments, and supplying credit to small business units, small and marginal farmers, micro and small industries, and other unorganised, sector/lending through informal channels.

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. The 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. 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 innovate further in terms of introducing customized and flexible offerings to target the untapped market.

Pros and strengths

Customer centric approach with focus on financial inclusion: It is a commercial bank focused on serving customers in the unbanked and underbanked segments in India and consider its customers to be the most significant stakeholders of its operations. While company’s business model has transitioned over the years, initially operating as a NBFC - MFI before commencing its SFB operations in 2017, its core focus has been to serve unbanked and underbanked customers. Given its operating history as microfinance institution, a significant portion of its portfolio continues to qualify as “priority sector lending” as mandated by the RBI and helps it promote financial inclusion in India. Significant portion of company’s inclusive finance loans, T-Nagar loans, commercial vehicle loans, affordable housing loans and secured and unsecured business loans and some portion of company’s commercial vehicle loans classify as “priority sector” loans based on the criteria notified by the RBI. On the liability side, the company offer its inclusive finance customers with savings bank accounts and recurring deposit product that enables customers to earn from their savings as well as ensuring that they form a part of formal banking channels. In addition, it arranges and offer discounts on hotel stays for its deposit customers as part of their pilgrimages to Shirdi in Maharashtra. It has also introduced an insurance product for its inclusive finance customers to cover losses and damages on account of natural calamities.

Diversified asset portfolio with focus on retail operations: Over the years, the Bank has been able to diversify its product portfolio to ensure that the proportion of net unsecured portfolio has reduced from 94.81% of its net advances in Fiscal 2018 to 77.49% in Fiscal 2020 and further to 74.59% in the nine months ended December 31, 2020. It commenced operations as a microfinance institution in 2009, and following its conversion to a SFB, it has been able to diversify into other products which broadly include commercial vehicle loans, affordable home loans, micro business loans, secured and unsecured business loans to MSME/SME and corporates and financial intermediary group loans. Its products cater to customer segments across the board. For instance, it offer inclusive finance loans and micro business loans for customers that are not a part of the formal banking infrastructure and undertake small businesses and individuals involved in agricultural allied activities, while it offer affordable housing loans to customers belonging to the middle and low income segment, secured business loans to SME/ MSME/ corporates, commercial vehicle loans to fleet owners and retail customers and unsecured business loans to low and middle class individuals, self-employed individuals and micro and small enterprises. It also provides commercial vehicle loans, institutional credit to NBFCs as well as various liability products to self-employed individuals, enterprises, corporates, partnership firms, banks etc. and mid-sized enterprises. In addition, it offers funds transfer facilities and distribute various general and life insurance products and mutual fund products.

Fast evolving granular deposit franchise: The bank has witnessed rapid growth in deposits between Fiscal 2018 and Fiscal 2020. Its deposit base has grown at a CAGR of 94.95% from Rs 7,495.22 million as of March 31, 2018 to Rs 28,487.15 million as of March 31, 2020 and was Rs 33,438.40 million as of December 31, 2020. As of December 31, 2020, its deposit base represented 69.22% of its overall funding profile. It is among the SFBs with the highest deposit growth rate in Fiscal 2020. It offers a variety of demand and time deposits and other services through which its customers can realize their savings goals. Its focus on productivity, better customer experience and customer acquisition along with expanding its operations has led to significant growth in its deposits. Its deposit products include a range of saving accounts, salary accounts, current accounts, recurring and fixed deposits. It also offers services such as bill pay, UPI based money transfer, safe deposit locker facilities for its customers. It offers debit cards to its customers and also make banking services available through its mobile banking application and internet banking platform. Its liability products are targeted primarily at retail customers and include senior citizens, upper middle-class individuals, self-employed and salaried individuals and HNIs.

Leveraging emerging technologies to enhance digital footprint: The company has leveraged technology to enable smooth and seamless customer experience. It has had its digital channels such as internet banking and mobile banking since commencement of its SFB operations. It extensively uses digital technologies for the entire customer lifecycle in its inclusive finance business. As of December 31, 2020, 3,261 employees use tablets/ digital services for opening of savings account and for customer on-boarding. The use of handheld devices has empowered its employees to provide assisted services to its unbanked and underbanked customer segments that has led to greater customer convenience and operational efficiency. As a result, it has been able to significantly reduce the turn-around time for processing inclusive finance loans to five days in in the nine months ended December 31, 2020. For opening Smile OD and savings accounts for existing inclusive customers, the process of opening account is completely digital and accounts are typically opened within a day. It leverages fintech partnerships to provide value added products and services to its customers.

Risks and concerns

Dependent on limited number of customers for portion of deposits: The bank is dependent on a limited number of customers for a portion of its deposits. Its customers may reduce or withdraw their deposits from its Bank, with or without cause or notice, at any time. Reduction or loss of such deposits expose it to an increasing funding risk, which could in turn adversely affect its financial performance and results of operations. A reduction in the services it performs for such customers or the loss of such major customers could result in a significant reduction of its deposits portfolio. Factors that may result in a loss of a customer include its service performance, reduction in budgets due to macroeconomic factors or otherwise and shift in policies and political or economic factors. There is significant competition for the services it provides and it is typically not an exclusive service provider to its large customers.

Depend on brand recognition: Any damage to the brand ‘Suryoday’ or to bank’s reputation could substantially impair its ability to maintain or grow its business, or could have a material adverse effect on its overall business, financial condition, results of operations and cash flows. If the bank fails to maintain this brand recognition with its existing and target customers due to any issues with its product offerings, a deterioration in service quality, or otherwise, or if any premium in value attributed to its business or to the brands under which its services are provided declines, market perception and customer acceptance of its brands may also decline. It also distributes third-party products via partnerships with external organizations over whom it has limited control. Any negative publicity/ press affecting such external organizations might also affect bank’s reputation and brand value. In such an event, it may not be able to compete for customers effectively, and its business, financial condition and growth prospects may be materially and adversely affected.

Operations involve handling significant amounts of cash: While the bank seek to increasingly transform its operations to a cashless model, a portion of its business, particularly with respect to collections, continues to be cash based. Its employees at its Banking Outlets are responsible for the collection and deposit of cash, thereby exposing it to the risks of loss, fraud, misappropriation, theft, assault and unauthorized transactions by its employees. While the bank seeks to prevent fraud or misappropriation by its employees through internal control measures, it may be unable to adequately prevent or deter such activities in all cases. In the past, the bank has experienced acts of fraud (as defined under the applicable RBI guidelines), theft, forgery and misappropriation committed by or involving its customers/ employees. In most cases, the frauds by employees are attributed to misappropriation of funds in respect of collection of dues from borrowers by the employees of the Bank and such collection amount not being deposited by the relevant employees.

Business currently significantly dependent on advances to inclusive finance (JLG) customers: Demand for company’s inclusive finance (JLG) products is affected by a number of factors, including changes in regulations and policies, any adverse publicity or litigation relating to the microfinance sector, political influence and policies and natural calamities. Any decline in the demand for bank’s inclusive finance (JLG) loans may adversely affect its business, financial condition, results of operations and cash flows. Its borrowers’ ability to repay their loans depends on various factors, including, the results of operations of its borrowers’ businesses, the occurrence of event-based risks and natural calamities, such as floods and cyclones. In particular, bank’s target borrower segment for inclusive finance (JLG) loans primarily comprises small traders, individuals with micro-enterprises and others belonging to the unorganized sector, who are most impacted due to the economic downturn caused by COVID-19 related measures such as closure of non-essential services.

Outlook

Incorporated in 2008, Suryoday Small Finance Bank is a leading Small Finance Bank (SFB) in India. The company started offering SFB services in 2017. They serve customers in the unbanked and underbanked segments. Before SBF, the company operated as an NBFC. The bank currently offers a variety of asset and liability products and services designed for inclusive finance and general banking customers. Its asset products consist of its inclusive finance portfolio (comprising loans to JLG customers), commercial vehicle loans, affordable housing loans, micro business loans, unsecured micro and small enterprise and small and medium enterprise loans, secured business loans, financial intermediary group loans and other loans. The company’s distribution and service channels comprise its Banking Outlets, ATMs, phone banking, mobile banking, tablet banking, CSPs and internet banking services. On the concern side, the company face its most significant organized competition from other SFBs, NBFCs, microfinance institutions and cooperative banks which have significant presence in rural areas, public sector banks, private sector banks, housing finance companies and other financial services companies in India. It may face asset and liability mismatches, which represents situations when the financial terms of an institution’s assets and liabilities do not match. It cannot assure you that it will be able to maintain a positive asset-liability gap. 

The issue has been offered in a price band of Rs 303-305 per equity share. The aggregate size of the offer is around Rs 578.52 crore to Rs 582.33 crore based on lower and upper price band respectively. On performance front, total income increased by 43.06% from Rs 5,970.29 million in Fiscal 2019 to Rs 8,541.38 million in Fiscal 2020. Net profit for the year was Rs 1,111.98 million in Fiscal 2020 as compared Rs 903.98 million in Fiscal 2019. The company intends to grow its secured portfolio which will grow at a faster pace as compared to inclusive finance portfolio due to its comparatively small base currently. It also intends to continue to advance commercial vehicle loans to large fleet operators and OEM’s to maintain and strengthen its existing relationships with these key customers. The company’s focus will be to disburse loans to self-employed and salaried individuals for non-agricultural properties and in particular in the affordable housing segment and leverage its existing inclusive finance distribution reach and customer base to source home loan customers.