Utkarsh Small Finance Bank Limited

A IPO Analysis

About Company

Incorporated in 2016, Utkarsh Small Finance Bank Limited is an SFB (Small Finance Bank) in India and recorded the second fastest AUM growth in the years Fiscal 2019 and Fiscal 2022 among SFBs with AUM of more than Rs. 50 billion. The bank extends its facilities to individuals and businesses to assist them with their financial requirements.

Company's Products

• Accounts and Deposits
• Cards
• Insurance and Investments
• Loans
• Ways to Bank

Business Overview

The company is an SFB in India and recorded the third fastest Gross Loan Portfolio growth between Fiscal 2019 and Fiscal 2023 among SFBs with Gross Loan Portfolio of more than ₹ 60 billion. Company's Promoter, Utkarsh CoreInvest Limited, commenced its operations as a NBFC in Fiscal 2010 and was focused on providing microfinance to unserved and underserved segments and in particular in the states of Uttar Pradesh and Bihar. The company have their headquarters located in Varanasi, Uttar Pradesh and have over the years expanded our SFB operations strategically in States where they have been able to leverage the prior microfinance experience of Utkarsh CoreInvest Limited.  

On October 7, 2015, Utkarsh CoreInvest Limited received the RBI In-Principle Approval to establish an SFB, following which it incorporated Utkarsh Small Finance Bank Limited as a wholly-owned subsidiary on April 30, 2016. Subsequent to them obtaining the RBI Licence on November 25, 2016, to establish and carry-on business as an SFB, Utkarsh CoreInvest Limited transferred its business of providing microfinance, as a going concern to their Bank, which commenced its operations from January 23, 2017. The comppany were included in the second schedule to the RBI Act as a scheduled commercial bank pursuant to a notification dated October 4, 2017 issued by the RBI and published in the Gazette of India (Part III - Section 4) dated November 7, 2017.

Company's operations are spread across India and are present in 26 States and Union Territories with 830 Banking Outlets and 15,424 employees, as of March 31, 2023. As of March 31, 2023, 27.35% of their Banking Outlets were located in Unbanked Rural Centres (“URCs”) as against the regulatory requirement of 25% of banking outlets of SFBs to be located in URCs. Company's operations are focused in rural and semi-urban areas and as of March 31, 2023, they had 3.59 million customers (both deposit and credit) majorly located in rural and semi-urban areas primarily in the states of Bihar and Uttar Pradesh that, in Fiscal 2022, are among the states with the best asset quality but with low and moderate credit penetration (Source: CRISIL Report, page 147). As of March 31, 2023, these states constituted 30.88% and 25.98% of their total Gross Loan Portfolio (based on location of the Banking Outlet), respectively. Company are also focused on further strengthening their presence in newer geographies in addition to existing states where they operate by entering into arrangements with business correspondents (“BCs”) and direct selling agents (“DSAs”) and as of March 31, 2023, company had tie-ups with 13 BCs to source customers and 321 DSAs to grow our asset portfolio. 

The following table sets forth certain information relating to their operations and financial performance in the periods specified:

Company's Strength

Sound understanding of microfinance segment and presence in rural and semi-urban areas  

Utkarsh CoreInvest Limited, originally commenced operations as a NBFC in Fiscal 2010 and later converted to a NBFC – MFI. Utkarsh CoreInvest Limited has a history of serving customers in the microfinance segment with a particular focus on financial inclusion for unserved and underserved customer segments in rural/ semi-urban areas of Uttar Pradesh, Bihar, Jharkhand, Madhya Pradesh, Chhattisgarh and Uttarakhand. The erstwhile business of Utkarsh CoreInvest Limited was primarily based on the joint liability group-lending model for providing collateral-free, small ticket-size loans to economically active poor women for income generation purposes. Utkarsh CoreInvest Limited also offered micro enterprise loans to the economically poor segments. Following the commencement of our SFB operations, we have further strengthened our engagement with borrowers by continuing to focus on microfinance and by diversifying our product offerings to include savings accounts, deposit products and other loan products. 

Growing deposits with focus on retail deposits  

The company offer a variety of demand and time deposit products along with other services through which their customers can address their savings and transactional needs. Company's product suite includes a range of deposit products including saving accounts, salary accounts, current accounts, recurring and fixed deposits (with callable and non-callable options) and locker facilities. Company also offer diversified liabilities products at competitive rates targeted primarily at retail customers from all segments led by senior citizens, middle-class individuals and self-employed and salaried individuals.

Diversified distribution network with significant cross-selling opportunities

The company have an extensive physical network of Banking Outlets and as of March 31, 2023, the company had 830 Banking Outlets across 26 States and Union Territories covering 253 districts in India of which 522 Banking Outlets were located in rural and semi-urban areas (combined). Company network of Banking Outlets allows them to service their existing customers and attract new customers as a result of relationships cultivated through proximity and frequent interaction by their employees. Company's network aims to reduce reliance on a particular region in India and allows us to replicate best practices developed in one region to other regions. 

Focus on risk management and effective operations 

Risk management is at the core of their operations, and they have over the years focused on robust and comprehensive credit assessment and risk management framework. Company's framework identifies, monitors and manages risks inherent in their operations and in particular manages credit, market, liquidity, IT and operational risks. Company's risk function has a system of measuring, monitoring and implementing risk parameters including real time monitoring of regulatory updates and trends in national and international markets, framing guidelines, policies and products in accordance with industry practices, defining admissible portfolio at risk for each product, an early warning system to provide signals for sector performance and limits on extending funds to a particular industry. For retail loans, NPAs are tracked based on how a particular employee sources such loan. If delinquency levels are high for a particular employee, an enquiry is initiated. Credit norms are made stringent for Banking Outlets that show higher delinquencies. Our credit risk policy outlines the broad framework within which policies and products are to be conceptualized. Our policy requires that the credit officer in the microfinance business is mandatorily rotated every six months and the risk department undertakes regular and surprise visits and interacts with zonal and regional managers to understand any matters of concern. We also have an IT system in place to monitor and control operational risk including fraud detection and incident reporting. Credit management is crucial to our business since a significant number of our customers are from the unserved and /or underserved financial segment and primarily first-time purchasers of financial products. We have implemented credit management models such as decentralized loan sanctioning for certain segments and stringent credit history checks. We also use solutions from credit bureaus to detect application frauds in our retail segment.

Leadership complementing company's strengths 

Company's Promoter, Utkarsh CoreInvest Limited, has a number of institutional investors including British International Investment PLC (formerly, CDC Group PLC), RBL Bank Limited, International Finance Corporation, NMI Frontier Fund KS, Lok Capital Growth Fund, SIDBI, HDFC Life Insurance Company Limited, HDFC Ergo General Insurance Company Limited, ICICI Prudential Life Insurance Company Limited, Faering Capital India Evolving Fund, Hero Enterprises Partner Ventures, responsAbility Participations Mauritius, Shriram Life Insurance Company Limited, Aavishkaar Bharat Fund, and believe that the diversified shareholding of our Promoter lends credibility to our business operations. 

Business discription of their business

Product Portfolio

The company offer a range of financial products and services that address the specific requirements of our customer segments. Company's product portfolio includes asset products that they advance to customers located primarily in unbanked and underbanked areas; and liability products in the form of deposits that they source from customers across regions. 

Asset Products  

The company categorize their asset products into (i) microbanking loans that include joint liability group loans and, individual business loans to customers within the joint liability group based on their credit worthiness and past behaviour in relation to repayment of their earlier loans; (ii) retail loans that includes unsecured loans, such as business loans and personal loans, and secured loans, such as LAP; (iii) wholesale lending that includes short term and long-term loan facilities to SMEs, mid and large corporates and institutional clients; (iv) housing loans with a focus on affordable housing; and (v) commercial vehicles and construction equipment loans. Categorization is largely determined by customer profile, type of security and end-use.

The table below sets forth our Bank’s Gross Loan Portfolio by product as of the dates indicated:  

Microbanking Loans 

Microbanking provides a comprehensive package of financial inclusion products and business development services to underprivileged or low-income individuals or groups who have limited access to financial services. Microbanking loans are provided with a tenor of 12 to 48 months. The interest rates on our microbanking loans are fixed and currently the rate of interest is 25% per annum. In the microbanking loan segment, our Bank offers loans through the JLG model and business loans to individuals from the JLG model based on their credit worthiness and past behaviour in relation to repayment of their earlier loans. 

In Fiscal 2023, the average ticket size of these loans was ₹ 0.04 million (based on loan outstanding). These loans were disbursed for an average tenure of 24.43 months in Fiscal 2023. The average yield for our microbanking segment was 22.08% in Fiscal 2023. In Fiscal 2021, 2022 and 2023, disbursements under this segment were ₹ 48,161.21 million, ₹ 72,739.52 million and ₹ 92,562.29 million, respectively. As of March 31, 2023, the Gross NPAs for this product segment were ₹ 3,768.38 million, representing 4.09% of our Gross Advances in this product segment.  

The number of total customers for our microbanking segment as of the periods indicated: 

Joint Liability Group Loans 

The company provide group loans built on the peer-guarantee loan model (JLG), which enables individuals to take loans without having to provide collateral or security on an individual basis, while promoting credit discipline through mutual support within the group, prudent financial conduct among the group, and prompt repayment of their loans. Group loan products are offered to economically active, unserved, and underserved customers to meet various requirements. The primary target customer segment for our microbanking business are women in households who are engaged in income-generating activities, or who intend to begin new income-generating activity on their own. As of March 31, 2023, all of our customers in the JLG loans segment are women. These loans range between ₹ 6,000 to ₹ 100,000 and primarily comprises, agriculture and allied activities related loan and loans for other income generating activities.

Credit Process and Evaluation  

The first step towards lending is the identification of potential areas for operation. Accordingly, a specified area is allocated to credit officers. The process of credit evaluation is conducted by an assistant branch manager or a branch manager or above.  The JLG lending process involves the credit officer conducting a village or locality survey followed by a report to the branch manager. The credit officer subsequently identifies potential clients who may be interested to form a lending group based on the information made available to them by the credit officer, including group norms such as mutual guarantee, loan products, rate of interest, repayment schedule and documentation required. Once approved, disbursements are made to a bank account only.

Retail Loans  

The company offer a combination of secured (such as commercial vehicle loans and loan against property) and unsecured loans (business and personal loans) to individuals and non-individual entities, such as micro, small and medium enterprises (“MSME”), which are engaged in business activities in the manufacturing and services sector, with flexible security requirements to make credit more accessible to the retail borrowers. We introduced our retail loan products in Fiscal 2017 and intend to facilitate the establishment, expansion and modernization of businesses, including acquiring fixed assets and meeting working capital needs. Further, lending to certain categories of eligible borrowers engaged in manufacturing or providing or rendering services with investment in plant and machinery and/ or equipment up to a certain amount and turnover are considered as ‘priority sector advances’ under the relevant RBI regulations.

Company's retail loans for individuals and non-individuals borrowers ranges between ₹ 300,001 and ₹ 250,000,000. In Fiscal 2023, the average ticket size of these loans was ₹ 1.91 million (based on loans outstanding), and they were disbursed for an average tenure of 128.98 months. The average yield for our retail loan segment was 12.26% in Fiscal 2023. In Fiscal 2021, 2022 and 2023, disbursements under this segment were ₹ 3,680.85 million, ₹ 4,565.01 million and ₹ 9,910.80 million, respectively. As of March 31, 2021, 2022 and 2023, the number of outstanding retail loans were 6,725, 7,395 and 8,039, respectively. As of March 31, 2023, the Gross NPAs for this business segment were ₹ 207.87 million, representing 1.36% of our Gross Advances in this product segment. Nonindividual entities, such as MSMEs, accounted for, 52.28% of our total retail loans segment in Fiscal 2023.

Gold Loan 

Gold loan is a short-term loan offered against the pledge of gold ornaments with a purity of 18 karat to 22 karat. Gold loans can be used for agricultural, educational, business, medical and other personal needs. We launched gold loans as a pilot on November 8, 2021, from four general Banking Outlets. As on March 31, 2023, out of a total of 82 outlets, 74 are general banking outlets which also offer gold loans and eight are microbanking outlets, in 15 states. As on March 31, 2023, gold loans outstanding were ₹ 70.09 million with portfolio average loan to value (LTV) of 74.66%.  

Company offer two schemes under their gold loan product:  

Utkarsh Navya: The loan amounts range between ₹ 10,000 and ₹ 1,500,000 with repayment tenure of six months. Under this scheme interest is paid along with principal at the end of tenure. The maximum loan to value ratio offered is 69.00%. Loan is offered at fixed interest rates between 12.00% and 24.00% per annum.

Utkarsh Swarna: The loan amounts range between ₹ 10,000 and ₹ 1,500,000 with repayment tenure of twelve months. Under this scheme interest is serviced every month. The maximum loan to value ratio offered is 75.00%. Loan is offered at fixed interest rates between 12.00% and 24.00% per annum.

Wholesale Lending  

Company provide short term and long-term loan facilities to SMEs, small and mid-corporates and institutional clients. The loans are offered to meet their on-lending, working capital and business expansion requirements. The company also provide a non-fund based product in the form of a bank guarantee. The products offered along with their nature and purpose are as below: 

Housing Loans  

Company Bank focusses on providing affordable housing loans to self-employed and salaried individuals. Company housing loan offerings are targeted towards formal, informal and semi-formal income segments and are provided for purchase/ construction of plots, purchase/ construction of house, improvement/ restoration/ extension of home. The loan amounts range between ₹ 200,000 and ₹ 10,000,000, and the repayment tenures for these loans range between three years and 30 years. These loans are offered at interest rates between 9.00% and 14.50% per annum.  

In Fiscal 2023, the average ticket size of these loans was ₹ 1.68 million (based on loans outstanding) and they were disbursed for an average tenure of 221.51 months. The average yield for our housing loan segment was 10.08% in Fiscal 2023. In Fiscal 2021, 2022 and 2023, disbursements under this segment were ₹ 1,532.28 million, ₹ 1,896.08 million and ₹ 2,363.73 million, respectively. As of March 31, 2021, 2022 and 2023, the number of outstanding housing loans were 1,672, 2,462 and 3,098, respectively. As of March 31, 2023, the Gross NPAs for this product segment were ₹ 264.33 million, representing 5.09% of our Gross Advances in this product segment.  

The NPA details for the housing loan segments are as follows:  

Network of Business Correspondents 

Network and Distribution

Management's Overview

Mr. Parveen Kumar Gupta is the part time non – executive chairman and Independent Director of our Bank. He holds a bachelor’s degree of commerce from Guru Nanak Dev University. He has been an associate member of The Institute of Company Secretaries of India since 1986. He is also a certified associate of the Indian Institute of Bankers. Prior to joining our Bank, he was associated with State Bank of India as their managing director (retail & digital banking) till his retirement on superannuation and Bank of Baroda as its senior advisor. 

Mr. Govind Singh is the Managing Director and chief executive officer of our Bank. He holds a bachelor’s degree in commerce from Delhi University. He is a certified associate of the Indian Institute of Bankers. He was previously the assistant general manager at ICICI Bank Limited. He has received an award of excellence for Apy Big Believers (ABB) 4.0 by Pension Fund Regulatory and Development Authority in Fiscal 2022. He was the managing director and chief executive officer of our Promoter. He has also been associated with Surya Fincap Limited, UTI Bank Limited, Allahabad Bank, State Bank of Patiala and Bank Internasional Indonesia.

Mr. Kajal Ghose is an Independent Director of our Bank. He holds a bachelor's degree in commerce from Ranchi University and a diploma in human resources development from All India Institute of Management Studies, Chennai. He is a certified associate of the Indian Institute of Bankers. He previously worked as the chief general manager at State Bank of India, as a consultant with PayU Payments Private Limited and at Stratosphere IT Services Private Limited and Kovid Group Analytics India Private Limited. He has also been a member of the board of advisors of Datawise Management Services India Private Limited. He currently is a member of the investment committee of New Leaf Investment Advisors LLP. 

Ms. Kalpana Prakash Pandey is an Independent Director of our Bank. She holds a bachelor's degree in science (chemistry, physics and mathematics) and master’s degree in science (physics) from Garhwal University, a master's degree in technology (computer science and technology) and a post-graduate diploma in electronics and communication engineering from the University of Roorkee (now known as Indian Institute of Technology, Roorkee). She has previously served as the managing director and chief executive officer of CRIF High Mark Credit Information Services Private Limited, an RBI licensed credit bureau. Additionally, she was also associated with IDBI Principal Asset Management Company, State Bank of India and HDFC Bank Limited.

Mr. Chandra Shekhar Thanvi is the nominee Director of our Bank, being a nominee of our lender SIDBI on our Board. He holds a bachelor’s degree of technology in mining engineering from Banaras Hindu University. He is a certified associate of the Indian Institute of Bankers Prior to joining our Bank, he was associated with Hindustan Zinc Limited as their senior engineer (mining). He has been associated with SIDBI since 1994 and is currently their chief general manager (CGM). 

Mr. Nagesh Dinkar Pinge is an Independent Director of our Bank. He holds a bachelor's degree in law from the University of Mumbai and is a qualified chartered accountant registered with the ICAI. He was previously associated with Tata Motors Limited, JSW Energy Limited, Reliance Retail Limited, ICICI Bank Limited and NKGSB Co-op Bank Limited.  

Object of the issue

The Utkarsh Small Finance Bank Limited proposes to utilize the Net Proceeds from the Issue towards augmenting its Tier - 1 capital base to meet its future capital requirements. Further, the proceeds from the Issue will also be used towards meeting the expenses in relation to the Issue.

Financial Performance

Balance Sheet

Profit and Loss

Cash Flow Statement

Key Profitability, Asset Quality and Other Parameters

IPO Details

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