Jana Small Finance Bank
- Jana Small Finance Bank is coming out with a 100% book building; initial public offering (IPO) of 1,43,64,354 shares of Rs 10 each in a price band Rs 393-414 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 February 7, 2024 and will close on February 9, 2024.
- The shares will be listed on BSE as well as NSE.
- The face value of the share is Rs 10 and is priced 39.30 times of its face value on the lower side and 41.40 times on the higher side.
- Book running lead managers to the issue are Axis Capital and ICICI Securities and SBI Capital Markets.
- Compliance Officer for the issue is Lakshmi R N.
Profile of the bank
The bank is the fourth largest Small Finance Bank in terms of Assets Under Management (AUM) and the fourth largest Small Finance Bank in terms of deposit size as at September 30, 2023. As at September 30, 2023, it had 771 banking outlets, including 278 banking outlets in unbanked rural centres, in 22 states and two union territories. It has served nearly 12 million customers since 2008, including 4.87 million active customers as at September 30, 2023. It was incorporated on July 24, 2006, registered as a non-banking finance company (NBFC) on March 4, 2008, and it was awarded non-banking finance company-microfinance institution (NBFC-MFI) status on September 5, 2013. It started operating as a Small Finance Bank with effect from March 28, 2018 and became a Scheduled Commercial Bank on July 16, 2019. The bank has gained an understanding of the financial needs of underbanked and underserved customers over the past 16 years. During this journey, apart from obtaining an in-depth understanding of customer behaviour and requirements in the segment, it has taken multiple steps to improve the customer experience. This has been achieved through a combination of measures, such as digital sourcing and digital disbursement of loans.
The bank’s primary secured loan products are secured business loans, micro loans against property (Micro LAP), MSME loans, affordable housing loans, term loans to NBFC, loans against fixed deposits, two-wheeler loans and gold loans. Its primary unsecured loan products are individual and micro business loans, agricultural and allied loans, and group loans (group loans are offered to a group of women as per the Joint Liability Group (JLG) model). Since becoming a Small Finance Bank, it has focused on increasing its secured gross advances to diversify its advances, and within unsecured advances, it has focused on growing its agricultural and allied loans.
The company is also a corporate agent for third-party life insurance products, general (non-life) insurance products and health insurance products, including COVID-19 insurance products. It also offers Point of Sales (POS) terminals and payment gateway services through its merchant acquiring partners. In addition to delivering its products and services through banking outlets and ATMs, it delivers its products and services through business correspondents, ATM cum debit cards, mobile banking platforms, internet banking portals and SMS alerts. In line with its vision, it has been upgrading its technology platforms. A significant proportion of the bank’s sourcing and collections across assets and liabilities are digitalised using mobile phones / tablets, with an emphasis on straight through processing while incorporating fraud and regulatory checks. PAN validation, e-KYC, credit bureau checks supporting multiple bureaus, and AML checks are fully automated using an integration layer. Its digital liability account opening platform, DIGIGEN (www.janadigi.com), provides a fully digital self on-boarding platform for opening accounts. DIGIGEN, coupled with its video-KYC platform enables digital only deposit accounts to be opened by its customers. It has also invested in various technologies, infrastructure, and tools to drive data analytics and to convert its data into impactful insights on the behavioural trends of its customers and prospective customers.
Proceed is being used for:
- Augmenting the Bank's Tier - 1 capital base to meet the Bank's future capital requirements.
- Meeting the expenses in relation to the Offer.
Industry overview
The banking industry is regulated by the Reserve Bank of India (RBI), which is the central bank of India established on April 1, 1935 under the Reserve Bank of India Act, 1934. As at March 31, 2023, the Indian banking system consisted of 12 public sector banks and 21 private sector banks, in addition to cooperative credit institutions (Source: RBI Annual Report 2022-23). The number of registered insured banks as at March 31, 2023 stood at 2,027, comprising 140 commercial banks including 43 regional rural banks (RRBs), 2 local area banks (LABs), 6 payment banks (PBs) and 12 small finance banks (SFBs) and 1,887 co-operative banks – the latter consisting of 33 state cooperative banks, 352 district central cooperative banks and 1,502 urban cooperative banks (UCBs). Total credit of Scheduled Commercial Banks (SCBs) has grown at a CAGR of 9.5% from Rs. 72.5 trillion as at March 31, 2016 to Rs. 136.8 trillion as at March 31, 2023. As per the Centre for Monitoring Indian Economy (CMIE), total credit is expected to increase to Rs. 179.2 trillion as at March 31, 2026(P). Total deposits of SCBs have increased at a CAGR of 9.9% from Rs. 93.3 trillion as at March 31, 2016 to Rs. 180.4 trillion as at March 31, 2023. As per CMIE, total deposit is expected to increase to Rs. 230.6 trillion as at March 31, 2026(P).
The growth in credit and deposit would be in line with the GDP growth of the country. Private sector banks have contributed more than public sector banks in credit growth and deposit growth in percentage terms in the last 3 fiscal years (Fiscals 2021 to 2023). Foreign banks have shown healthy growth in deposits over the last 3 fiscal years and small finance banks have shown high double-digit growth in credit and deposits due to the small base effect. The overall banking sector for FY24 and the banking system’s health continues to be at its best in decades. The key financial metrics are likely to continue to improve in FY24, backed by strengthened balance sheets, encouraging credit demand and flattening expectations of market interest rates leading to, among other things, normalisation of profitability from treasury operations. Credit demand growth of 13.5% y–o–y for FY24 is expected to come in from retail, services segment, infrastructure and government/ public sector units’ capex. The banking system’s net interest margins (NIMs) may see a modest decline in FY24 from the current levels, given the expected increase in deposit rates (prospective as well as full impact of rate increases in the past 10 months); a part of this may be offset by normal treasury operations as the yield curve flattens.
Pros and strengths
Digitalised bank and majority of its services available in digital form to customers: It is a digitalised bank. Its core banking is supported by integrated multi-channel operations. It leverages technology to identify potential opportunities, deliver products and services to its target customers, and improve customer satisfaction and business efficiency. Its back-end operations, including the core banking system, human resources, customer relationship management systems, anti-money laundering check system, lead management system, collection and disbursement systems, as well as treasury operations, are automated using robotic process automation technology and other automation processes, which has helped improve the internal turnaround time. Its new products are designed with application programming interface (API) technology to increase operating efficiencies, deliver better quality services, and to allow it to integrate with the larger ecosystem leveraging on the API framework. It offers its customers a number of digital products, services and platforms, including mobile banking and internet banking (retail and corporate). All banking and payment transactions, such as remittances, can be completed through these platforms. Its customers are also able to register for deposit accounts on a unified payment interface-based mobile application. It has implemented technology solutions that enable it to execute cashless disbursement of loans.
Integrated risk and governance framework: The company adopts an integrated risk management approach. Its integrated risk management framework lays down its core principles in identifying, measuring, assessing, and managing the key risks. It has put in place detailed risk management policies and a governance structure for each type of key risks, including credit, operations, liquidity, interest rate, market, cyber and information security, and reputational risks. Its risk governance structure is clearly defined for each key risk. Its risk-focused culture involves reward programmes that incorporate risk-related objectives, and learning programmes to promote integrated risk management. It has designed, implemented, and maintained an effective risk programme and follow risk-based oversight. Each of its risk-related management committees is responsible for overseeing the management of risks on a regular basis and report to the Board. It has an independent system that is used to evaluate the effectiveness of its risk management policies. The bank entrench risk ownership in every business function and every department has its own functional operational risk committee. Each of its Branches, customer service points, central processing units, and functional departments is responsible for the performance of its business operations and the management of the risks it takes within the established risk framework.
Customer-centric organization: The bank has more than 16 years’ experience in serving underbanked and underserved customers and most of its asset products are catered for such customers and the MSME segment. It provides banking services at its customers’ doorsteps in urban and rural geographies, thereby driving financial inclusion for the underbanked and underserved customer segment. The bank provides them with not only unsecured group loans and agricultural and allied loans, but also individual loans for various purposes and micro business loans as well as current accounts, savings accounts, and term deposits. Its digital savings and fixed deposit bank account digital self-on-boarding platform, DIGIGEN, coupled with its video-KYC platform, delivers the full account opening process to its customers in the safe confines of their homes or any other place of their choice. The bank recognize that its business is driven by the acquisition of new customers and retention of existing ones. As part of its commitment to its customers, it has put in place a customer service policy that details its customer service delivery standards, defines how customer complaints and grievances shall be handled, and sets out its customers’ rights.
Fast growing Retail Deposits base and diversified deposit franchise: The bank has been able to leverage the strength of the “Jana” brand to rapidly grow its deposit portfolio since it commenced operations as a Small Finance Bank in March 2018. As an NBFC, it was not permitted to accept deposits as per applicable laws in India. It offers a diverse range of deposit products to appeal to different segments of its customer base. Its deposit products comprise current accounts, savings accounts, recurring deposits and term deposits. It offers a variety of term deposits with multiple interest payment options, along with competitive interest rates. It also offers higher interest rates for senior citizens. Since becoming a Small Finance Bank, it has placed a strong emphasis on increasing its Retail Deposits, as they have lower rates of interest compared to Bulk Deposits and are more likely to stay deposited with it over a longer period compared to Bulk Deposits.
Risks and concerns
Subject to interest rate risk: The bank’s results of operations are substantially dependent upon the amount of its net interest income, which it defines as interest earned less interest expended (Net Interest Income). Its Net Interest Income is significantly dependent on its average total interest-earning assets, which are total interest-earning assets calculated on the basis of the average of the opening balance at the start of the relevant year and the closing balance as at quarter end for all quarters in the relevant year (Average Total Interest-Earning Assets) and its Net Interest Margin, which is the ratio of Net Interest Income to Average Total Interest-Earning Assets (Net Interest Margin). Its results of operations are substantially dependent upon the amount of its net interest income, which it defines as interest earned less interest expended (Net Interest Income). Its Net Interest Income is significantly dependent on its average total interest-earning assets, which are total interest-earning assets calculated on the basis of the average of the opening balance at the start of the relevant year and the closing balance as at quarter end for all quarters in the relevant year (Average Total Interest-Earning Assets) and its Net Interest Margin, which is the ratio of Net Interest Income to Average Total Interest-Earning Assets (Net Interest Margin).
Face asset liability mismatches: The bank faces liquidity risks due to mismatches in the maturity of its assets and liabilities. It may rely on funding options with a short-term maturity period for extending long-term loans, which may lead to an asset liability mismatch for certain periods. Mismatches between its assets and liabilities are compounded in case of pre-payments of the advances it grants to its customers. Further, asset liability mismatches create liquidity surplus or liquidity crunch situations and depending upon the interest rate movement, such situations may adversely affect its Net Interest Income. If it is unable to obtain additional borrowings or renew its existing credit facilities for matching tenures of its loan portfolio in a timely and cost-effective manner or at all, it may lead to mismatches between its assets and liabilities, which could adversely affect its financial condition, results of operations and cash flows.
Face intense competition: The bank faces intense competition in all its principal products and services. It primarily competes with other Small Finance Banks, other types of banks and NBFCs to provide secured loans to businesses, gold loans and affordable housing loans and it also compete with housing finance companies to provide affordable housing loans. There are multiple players in the microfinance sector with varied organisational structures. Loans in the microfinance sector are offered by Small Finance Banks as well as other banks, non-banking finance company-microfinance institutions (NBFCMFIs), other non-banking finance companies and non-profit organisations. Its competitors in the organised sector may have better brand recognition, greater business experience, more diversified operations, a greater customer and depositor base, a larger branch network and better access to funding and at lower costs than it does. Furthermore, certain requirements that are applicable to Small Finance Banks in terms of the SFB Operating Guidelines and other banking laws and regulations are significantly more stringent in comparison to Scheduled Commercial Banks and NBFCs. Ensuring compliance with these laws and regulations has and will continue to limit its revenue, thereby making it more difficult to compete with other players in the organised sector.
Weaknesses, disruption or failures in IT systems could adversely affect business: The bank is reliant on information technology (IT) systems in connection with, but not limited to, financial controls, risk management and transaction processing. The size and complexity of its computer systems may make them potentially vulnerable to breakdown, system integration problems, malicious intrusion and computer viruses. Its ability to operate and remain competitive depends in part on its ability to maintain and upgrade its IT systems and infrastructure on a timely and cost-effective basis, including its ability to process a large number of transactions on a daily basis. Its operations also rely on the secure processing, storage and transmission of confidential and other information in its computer systems and networks. Its financial, accounting and other data processing systems, management information systems and its website may fail to operate adequately or become disabled as a result of events beyond its control, including a disruption of electrical or communications services.
Outlook
Incorporated in July 2006, Jana Small Finance Bank is a non-banking finance company primarily engaged in providing MSME loans, affordable housing loans, term loans to NBFC, loans against fixed deposits, two-wheeler loans and gold loans. The bank offers various unsecured loan products, including individual and micro business loans, agricultural and allied loans, and group loans. The bank classifies loans into three categories: individual loans for home improvement/repair; individual loans for school fees; and individual personal loans for debt consolidation, family functions, incidental expenses, and business purposes. The bank has more than 16 years’ experience in serving underbanked and underserved customers and most of its asset products are catered for such customers and the MSME segment. It provides banking services at its customers’ doorsteps in urban and rural geographies, thereby driving financial inclusion for the underbanked and underserved customer segment. On the concern side, the bank cannot assure that any new products and services it introduces will be successful, whether due to factors within or outside of its control, such as general economic conditions, a failure to understand customer demand and market requirements. In the event that it fails to launch new products or services successfully, it may lose any or all of the investments that it has made in promoting them and training its employees, and its reputation would be harmed.
The bank is coming out with an IPO of 1,43,64,354 equity shares of face value of Rs 10 each. The issue has been offered in a price band of Rs 393-414 per equity share. The aggregate size of the offer is around Rs 564.52 crore to Rs 594.68 crore based on lower and upper price band respectively. On performance front, the bank’s total income increased by Rs 6,375.10 million, or 20.82%, to Rs 36,998.75 million for Fiscal 2023 from Rs 30,623.65 million for Fiscal 2022. The bank’s net profit for the year was Rs 2,559.71 million for Fiscal 2023 compared to a net profit of Rs 174.71 million for Fiscal 2022. Meanwhile, the bank’s plan is to focus on affordable housing loans and loans against property with HOME 360 as the primary product. Customers of HOME 360 are able to hold multiple loan products with the Bank and use their homes as collateral. This allows it to secure better credit at lower costs and opportunities for cross-selling under the secured loans book. It also plans to continue to cross-sell gold loans to microfinance institutions customers and to maximize output through product and pricing strategies. It will also expand the offering of new gold-loan product variants, like the agri gold loan launched in Fiscal 2022, to all outlets focused on agriculture sourcing.
