Capital Small Finance Bank
- Capital Small Finance Bank is coming out with a 100% book building; initial public offering (IPO) of 1,16,73,688 shares of Rs 10 each in a price band Rs 445-468 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 44.50 times of its face value on the lower side and 46.80 times on the higher side.
- Book running lead managers to the issue are Nuvama Wealth Management, DAM Capital Advisors and Equirus Capital.
- Compliance Officer for the issue is Amit Sharma.
Profile of the company
Capital Small Finance Bank commenced operations as India’s first small finance bank in 2016 pursuant to RBI’s approval dated March 4, 2016. The company offers a range of banking products on the asset and liability side, in all the states it operates in, i.e., Punjab, Haryana, Delhi, Rajasthan, Himachal Pradesh and Union Territory of Chandigarh. The company has an experience of over two decades in the banking industry, having been incorporated in 1999. The company is regulated by RBI and are one out of the two non-NBFC microfinance entities to receive the SFB license in 2015. The company’s core strategy is to strengthen its retail focused banking franchise by enabling access to affordable credit in the states it operates in its well defined niche catering to middle income group segment with special emphasis on rural and semi-urban areas.
The company focuses primarily on the middle-income customer segments i.e., customers with an average annual income of Rs 0.4 million to Rs 5 million in semi-urban and rural areas with 41.62% of its branches in rural areas, 34.68% branches in semi-urban areas and 23.70% of its branches in urban areas as on September 30, 2023. Since it focuses primarily on the middle-income customer segments, its full suite of products and services on the asset and liability side will provide it an opportunity to serve more customers in the middle-income segment that have limited or no access to formal banking channels, spread across rural and semiurban areas. The company’s background as a local area bank helped it in understanding needs of its target customers but restricted its geographical outreach. Post conversion into a small finance bank, it has been able to expand its operations into new and contiguous geographies which has enabled it to widen its customer base and resulted in improved operational and business metrics.
Over the years, the company has expanded its operations strategically in the north Indian states of Punjab, Haryana, Rajasthan, Delhi, Himachal Pradesh and Union Territory, Chandigarh. As of September 30, 2023, it presents in five States and one Union Territory with 173 branches and 175 ATMs with 76.30% of its branches located in rural and semi-urban areas covering 24 districts and 75.75% of its total customers (both credit and deposit). The company has diversified portfolio with sizeable book in multiple asset classes with proportion of secured lending of 99.85% as on September 30, 2023. It has average gross NPA ratio of 2.52% and average net NPA ratios of 1.30% with negligible write offs as a percentage of loan book for previous three Fiscals and first half of current fiscal year from Fiscal 2021 to six-month period ended September 30, 2023. It also had consistent asset quality in the range of 2-3% from Fiscal 2021 to six-month period ended September 30, 2023.
Proceed is being used for:
- Augmenting its Bank’s Tier-I capital base to meet the Bank’s future capital requirements.
- The proceeds from the Fresh Issue will also be used towards meeting the expenses in relation to the Offer. The Bank expects to receive the benefits of listing the Equity Shares on the Stock Exchanges.
Industry overview
In 2013, the RBI constituted a committee to further their goal of financial inclusion. The committee recommended differential licencing in the form small finance banks which was chaired by Mrs. Usha Thorat. On November 27, 2014, the RBI released guidelines for a new class of banking entity called small finance banks that would cater to the diverse needs of low-income groups. On September 16, 2015, the RBI awarded small finance bank licences to 10 players on account of the government’s focus on financial inclusion and inclusive banking. 8 out of the 10 entities given in-principal approval were microfinance institutions. Players like AU SFB and Capital SFB are the only two that are not NBFC-MFIs to receive an SFB license. They were given approval on account of lending in contiguous districts, mobilizing rural savings and making them available for local investments and were aimed at furthering financial inclusion. These were given SFB licenses on account of their lending primary in the rural and semi-urban regions as well as furthering financial inclusion by means of bringing high number of people into the banking fold.
Small finance banks’ AUM clocked 29% CAGR during Fiscals 2018-2023. CRISIL MI&A expects the sector’s loan portfolio to see a strong 22-24% CAGR from Fiscal 2023 to Fiscal 2025 as most of the SFBs have completed the transition phase and likely to get benefit from the operating leverage. In terms of branches, the share of SFBs in total branches is lowest in the Central region followed by Eastern region and then Northern region. These areas are still largely dominated by public sector banks. This provides considerable opportunity to SFBs to gain further share through their specialised offerings and expanding their services to the underbanked. The share of SFBs in deposits as well as credit has seen a steady rise over the years and is expected to reach 1.5% and 1.6% respectively by Fiscal 2025 from the current 0.9% and 1.4% in deposits and credits in Fiscal 2023. This will be on the back of robust growth on account of focused penetration and on the ground reach of these entities in comparison to the other more established player groups.
Meanwhile, the Indian housing finance market clocked a healthy 15% CAGR (growth in loans outstanding) over fiscals 2016-2023 on account of a rise in disposable income, healthy demand and a greater number of players entering the segment. Indian Housing Finance market witnessed low disbursements in the first quarter of Fiscal 2021 on account of pandemic, however the overall market grew by 14% in Fiscal 2022 due to improved affordability, pent-up demand and historically low interest rates. In Fiscal 2023, despite the aggressive rate hikes by RBI, the credit growth for Indian Housing Finance market stood at 18% year on year on account of pent-up housing demand and focus on increase in housing penetration in Tier I and Tier II cities. Faster growth in smaller districts and relatively muted demand for high ticket housing in metros have led to increased share of smaller districts (tier-II and below cities) in housing loans over the last couple of years.
Pros and strengths
Retail focused liability franchise with a high share of CASA: The company has created a retail centric deposit franchise with a high share of CASA deposits with CASA ratio increasing from 40.08% in Fiscal 2021 to 41.88% in Fiscal 2023. The company’s experience of operating as a local area bank for over 16 years provides it a competitive edge with respect to its understanding on growing its deposit base. The company’s holistic suite of banking products, deeply relationship-based banking approach, entrenched branch network, single window service, customer friendly practices and brand equity has aided retail centric deposit profile. With its comprehensive suite of products of savings bank deposits, current deposits, term deposits, NRE and NRO deposits and tax saver deposits, the company is able to cater to the diverse needs of its customers across its areas of operations. The company’s brand equity associated with its name in its areas of operation has also aided the growth of its liability franchise coupled with its marketing efforts which have improved visibility of its brand.
Secured and diversified advances portfolio: The company has consciously focused on building a secured and granular loan book over the years with a focus on income generation. As on March 31, 2023 and September 30, 2023, 99.82% and 99.85% of its loan book, being Rs 54,975.90 million and Rs 58,571.93 million was secured with 85.16% and 84.26% respectively of the loans being secured with immovable properties. The company has a well-diversified portfolio across products (agricultural, MSME and trading, mortgage lending and other products) which helps it to mitigate risk and optimise its resources. The company focuses on the middle-income group segment and aim to be the primary banker of its customers. With this endeavour, it offers a full suite of products and services on the asset and liability side to address its customer needs. The average ticket size of its agriculture, MSME & trading and mortgage lending products was Rs 1.23 million, Rs 1.82 million and Rs 1.16 million as of March 31, 2023 and the same stood at Rs 1.24 million, Rs 1.81 million and Rs 1.15 million as on September 30 2023 respectively.
Streamlined credit assessment processes and risk management practices: The company’s credit assessment processes and risk management practices enables it to maintain good asset quality and low delinquencies. The company’s strategy of secured lending, primarily for productive purposes and conservative loan to value ratio contributes towards lower delinquencies and credit losses. Its positioning as the primary banker to most of its customers enables it to have a comprehensive view of and control over their cash flows contributing towards effective credit assessment. The company’s credit assessment involves multiple levels of independent review of information. Moreover, it has a credit sanctioning committee which oversees the exposures of an amount involving Rs 12.50 million or above and a dedicated team to monitor the exposures granted by it. It follows a principle of secured lending which has resulted in maintaining high asset quality. Its advances stood at Rs 55,072.67 million, and Rs 58,659.37 million with 99.82% and 99.85% of it being secured loans as of March 31, 2023 and as of September 30, 2023 with an average ticket size of Rs 1.34 million and Rs 1.37 million respectively.
Customer centric approach and understanding of target customers: The company has gained an understanding of its market and customer base over the years that enables it to meet the financial requirements of its existing and potential customers. Customers prefer a single source for multiple financial services, and accordingly offer a range of credit and non-credit products and services to address a variety of financing requirements of the customer through its branch network. These practices helped it to achieve its endeavour of having primary banking relationship. The company’s main focus is on providing its products and services to catering to middle income group segment with special emphasis on rural and semi-urban areas in its areas of operations. It is being a one-stop financial hub for its customers where it operates. As of March 31, 2023 and September 30, 2023, it had 7,01,071 and 7,25,037 customers respectively (both credit and deposit). Further, as on September 30, 2023, it had 173 branches and 175 ATMs with 76.30% its branches located in rural and semi-urban areas.
Risks and concerns
Geographical constrain: The company’s business is concentrated in North India, particularly in the state of Punjab. As of September 30, 2023, it had a total of 173 branches out of which 149 branches, aggregating to an approximate of 86.13% of its total branches across the country are located in Punjab. Further, it does not have significant branches in NCT of Delhi presently. Due to this concentration, the success and profitability of its overall operations may be exposed to regional factors which include, among others, the growth in population, income and savings levels, increased competition as more players enter these geographies, financial health of borrowers in these areas, and the risk of their over-indebtedness, changes to local laws and regulations influx or efflux of migrant populations in these regions, civil, economic disruptions, political or social unrest and other natural calamities. Adverse developments in any of the above factors would affect it more than they might affect banks with wider geographic diversity. Any one of these events may require it to close its branches, temporarily shut down operations, or lower lending levels, and may result in a material adverse change in its business, financial condition, results of operations and cash flows.
Not made provisions in Financial Statements in respect of direct tax dispute with Income-Tax Department: The company is currently involved in a tax matter with the Income-Tax Department, with respect to the addition by the Department of certain amounts deducted by the Bank under the heads ‘depreciation on investments’ and ‘broken period interest’. The matter is currently pending in appeal before the High Court of Punjab and Haryana. As on September 30, 2023, the amount involved in this matter (excluding interest and penalty, if any, which may be levied at the time of final determination), is Rs 12.21 million. While it has recognised the aforementioned amount of Rs 12.21 million as a contingent liability under the head ‘Claims against the Bank not acknowledged as debts’ as on September 30, 2023, it has not made provisions for this amount in its Restated Financial Information. Since similar matters in the past have been decided in its favour, it expects the outcome of this matter to be favourable. However, it cannot assure that this matter will be decided in its favour, or that the recognition of the amount of Rs 12.21 million as a contingent liability is adequate. Any adverse decision in any of these proceedings may impose a higher amount on the Bank and may have an adverse effect on its business, results of operations and financial condition.
Contingent liabilities: The company’s contingent liabilities may become actual liabilities and if a significant portion of these liabilities materialize, it could have an adverse effect on its business, financial condition and results of operations. Further, there is no guarantee that customers on whose behalf it has given the guarantees will honour their commitment and the guarantees given by the bank will not be invoked in whose favour such guarantees have been issued by the Bank which could adversely impact its financial condition, cash flows and results of operations. For instance, as on September 30, 2023, the bank has given guarantees, in the ordinary course of business, on behalf of the customers in India amounting to Rs 429.39 million which constitutes 81.14% of the total contingent liabilities of the Bank and any default on the part of its customers could result in these guarantees being invoked. Furthermore, there can be no assurance that it will not incur similar or increased levels of contingent liabilities in the current Fiscal or in the future.
Depend on its brand recognition: The company has invested in promoting its brand to make it familiar with its customers in the locations where it has its operations, and it expects to continue to invest in increasing its brand awareness. With the market becoming increasingly competitive, maintaining and enhancing its brand will become more important for its business. Further, reputational risk, or the risk to its business, earnings and capital from negative publicity, is inherent in its business. If it experiences any negative publicity, it could adversely affect its brand and ability to attract and retain customers. The reputation of the financial services industry in general has been closely monitored as a result of the financial crisis and other matters affecting the financial services industry. Negative publicity can result from its actual or alleged conduct in any number of activities, including lending practices and specific credit exposures, the level of non-performing loans, corporate governance, regulatory compliance, mergers and acquisitions, and related disclosure, sharing or inadequate protection of customer information, and actions taken by government, regulators, investigative agencies, judiciary and community organizations in response to that conduct.
Outlook
Capital Small Finance Bank is a small finance bank. In 2015, Capital SFB became the first non-NBFC microfinance entity to receive the SFB license. The company has a strong presence in semi-urban and rural areas with a branch-based operating model. Capital Small Finance Bank targets middle-income customer segments with an annual income of Rs 0.4-5 million. It aims to be the primary banker for these customers through a mix of product offerings, customer service, physical branches, and digital channels. It is headquartered in Jalandhar, Punjab and has strategically expanded its SFB operations in northern states of India such as Punjab, Haryana, Rajasthan, Delhi, Himachal Pradesh and UT Chandigarh. On the concern side, the company’s business is concentrated in North India, with approximately 86.13% of its total branches i.e., 149 branches out of a total of 173 branches, as of September 30, 2023 are located in the state of Punjab. Any adverse change in the economy of North India could have an adverse effect on its financial condition, results of operations and cash flows. Moreover, the company has not made provisions in its Restated Financial Statements for the amount involved in respect of the direct tax dispute with the Income-Tax Department, i.e., Rs 12.21 million.
The company is coming out with an IPO of 1,16,73,688 equity shares of face value of Rs 10 each. The issue has been offered in a price band of Rs 445-468 per equity share. The aggregate size of the offer is around Rs 519.48 crore to Rs 546.33 crore based on lower and upper price band respectively. On performance front, the company’s income increased by Rs 930.79 million or 14.72%, from Rs 6,324.03 million in Financial Year 2022 to Rs 7,254.82 million in Financial Year 2023. Moroever, the company’s net profit for the year increased by Rs 310.27 million or 49.59%, from Rs 625.69 million for Financial Year 2022 to Rs 935.96 million for Financial Year 2023. The company has established itself in the areas it operates and plans to expand its reach. It intends to undertake geographical expansion by not only penetrating its existing markets deeper by opening new branches in the home state of Punjab but also entering newer territories. It will leverage its brand presence in Punjab and expand further in adjacent states of Haryana, Union Territory of Chandigarh, Rajasthan, NCR and Himachal Pradesh. Its strategy to scale-up its operations is aimed at developing a deeply entrenched geographical presence which will put it in a position to service a larger market for credit and effectively grow its advances. Further, the company is well positioned to take advantage of the tailwinds and intend to continue to grow its portfolio with focus on secured lending which will provide it a competitive edge over its competitors.
Capital Small Finance BankCapital Small Finance Bank is coming..
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