Article

Equitas Small Finance Bank Ltd. (Information Note)

21 Oct 2020 Nikita Bhoota

This document summarizes a few key points related to the issue and should not be treated as a comprehensive summary. Investors are requested to refer the Red Herring Prospectus for further details regarding the issue, the issuer company and the risk factors before taking any investment decision. Please note that investment in securities is subject to risks including loss of principal amount and past performance is not indicative of future performance. Nothing herein constitutes an offer of securities for sale in any jurisdiction where it is unlawful to do so. This document is not intended to be an advertisement and does not constitute an invitation or form any part of any issue for sale or solicitation of an offer to subscribe for or purchase any securities and neither this document nor anything contained herein shall form the basis for any contract or commitment whatsoever.


Issue Opens- October 20, 2020
Issue Closes- October 22, 2020
Face Value: Rs.10
Price Band- Rs.32-33
Issue Size- Rs.518 cr (at upper price band)
Bid Lot- 450 equity shares
Issue Type: 100% Book building

 

% Shareholding

Pre IPO

Promoter and Promoter Group

95.5

Public

4.5

Source: RHP


Company Overview

Equitas Small Finance Bank (ESFB) is the largest SFB in India in terms of number of banking outlets, and second largest in terms of assets under management (AUM, 16% market share in India) and total deposits in Fiscal 2019 (Source: CRISIL Report). It offers a range of banking products and services with a focus on serving the financially unserved and underserved customer segments in India. Its assets products include provision of small business loans comprising LAPs, housing loans, agriculture loans to micro-entrepreneurs, microfinance to JLGs, used and new commercial vehicle loans, MSE loans, corporate loans and other loans including gold loans. On the liability side, it caters to mass and mass affluent individuals to whom they offer current accounts, salary accounts, savings accounts, and a variety of deposit accounts. As of June 30 2020, its percentage of gross NPAs to gross advances was 2.68%, while percentage of net NPAs to Net Advances was 1.48%. Its Gross Advances (including securitization/ IBPC) were Rs15,573cr and deposits were Rs11,787cr as of June 30, 2020. Secured Advances constituted 75.75% of the total gross advances (including IBPC issued) as on June 30, 2020.

Objective of the Offer:

The offer comprises of a Fresh Issue and an Offer for Sale. ESFB intends to raise fresh capital of Rs280cr which will be utilized towards augmenting the bank’s Tier – 1 capital base to meet its future capital requirements such as organic growth and expansion and to comply with regulatory requirements for enhanced capital base. ESFB shall not receive any proceeds from the offer for sale.

Financials

Cr.( except percentages)

FY18

FY19

FY20

Q1 FY21

Gross Advances (including securitization / IBPC)

7,937

11,703

15,367

15,573

Total Disbursements

5,809

8,578

9,911

564

Total Assets

13,301

15,763

19,315

20,892

Total Deposits

5,604

9,007

10,788

11,787

 

 

 

 

 

Total Income

1,102

1,435

1,778

434

Net Interest Income

861

1,152

1,495

404

PAT

32

211

244

58

 

 

 

 

 

Return on average equity (%)

1.57

9.85

9.84

8.32^

Return on average assets (%)

0.30

1.45

1.39

1.15^

Cost to income ratio (%)

79.97

70.30

66.38

67.27

GNPA (%)

2.68

2.53

2.72

2.68

NNPA (%)

1.46

1.44

1.66

1.48

 

 

 

 

 

CASA Ratio (%)

29.23

25.25

20.47

19.97

Retail term deposit to total term deposit ratio (%)

16.20

24.30

44.42

46.40

Source: RHP, 5paisa Research; ^on annualized basis

For additional information and risk factors please refer to the Red Herring Prospectus. Please note that this document is for information purpose only

Key Positives

Customer centric organization with a deep understanding of the unserved and underserved customer segments

ESFB’s strength lies in promoting financial inclusion within customer segments that are financially unserved and underserved in India. This enables the company to comply with RBI’s requirements for SFBs including meeting “priority sector” lending requirements. As of June 30, 2020, advances to the unserved and underserved segments represented 89.12% of its Gross Advances (including IBPC issued).

ESFB has gained a deep understanding of the market over the years that enables it to meet the financing requirements of potential customers. It undertakes research on various segments within these markets to understand their borrowing profile in the absence of formal documentation.

ESFB believes that the customers prefer a single source for multiple financial services, and it has accordingly customized a range of credit and non-credit products and services to address a variety of financing requirements like small-ticket recurring deposits to promote savings with in its customer segments and distribution of insurance policies like ‘hospital daily cash benefits’, an insurance product to cover emergency medical expenses of its customers.

It also develops products to match the growth cycle of target customer base. For instance, its microfinance customers tend to require micro-LAP loans, and as their enterprises mature, will be able to obtain MSE loans/ working capital loans.

Among the largest SFBs in India with a well-diversified asset portfolio

ESFB is the largest SFB in India in terms of number of banking outlets, as of March 31, 2019, and in Fiscal 2019 they recorded the fourth lowest yields indicating diversification away from microfinance (Source: CRISIL Report). ESFB has been able to successfully diversify its loan portfolio and significantly reduce dependence on microfinance business as compared to other microfinance companies that have converted to SFBs (Source: CRISIL Report).

It assesses the track record of existing customers to advance higher credit to meet their specific financial requirements, thereby further customizing few of its products. This approach has resulted in the growth of its gross secured loan product portfolio, which has grown at a CAGR of 48.35% from Rs5,265cr as of March 31, 2018 to Rs11,585cr as of March 31, 2020, and was Rs11,797cr as of June 30, 2020. Within its credit portfolio, small business loans (including housing loan) and vehicle finance product segments recorded significant growth with a CAGR of 53.34% and 29.62%, respectively, from March 31, 2018 to March 31, 2020.

The bank believes that it is relatively insulated from counter cyclical impacts across economic cycles owing to its diversified asset base and each of its product lines is well positioned to grow, creating a foundation of stability, sustainability and scalability for our operations.

Customized credit assessment procedures for effective credit risk management

ESFB applies different credit assessment procedures based on the products they offer. For instance, sanctioning small business loans involves telephonic checks with the potential customer, followed by in-person meetings by the senior loan officer to understand the business, cash flows and other parameters based on which a proposal is prepared. The senior loan officer’s proposal is scrutinized and in certain circumstances, reassessed to check for discrepancies, if any. For vehicle loans, they also undertake inspections of the vehicle through an independent expert, to verify registration information, condition of the vehicle and market value. They additionally apply a proprietary discounted cash flow model, which is adjusted based on the income profile of the customer and type of product. It also has risk management framework to identify, measure, monitor and manage credit, market and operational risks including IT security risk.

ESFB’s risk management and credit evaluation processes, together with its ability to evaluate risk, have enabled it to contain level of NPAs, restructured standard asset and special mention accounts category 2 levels. As of June 30, 2020, Gross NPAs were 2.68% of Gross Advances (including IBPC issued), and Net NPAs were 1.48% of Net Advances.

Key Risks

The continuing impacts of COVID-19 are highly unpredictable and could be significant, and may have an adverse effect on its business, operations and future financial performance.

ESFB is subject to stringent regulatory requirement including RBI’s SFB Licensing Guidelines as per which ESFB’s Promoter Equitas Holdings Limited is required to reduce its shareholding in ESFB to 40% on or prior to Sept 4, 2021.

Watch this video to know more about Equitas Small Finance Bank IPO -

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Equitas Small Finance Bank Ltd. (Information Note)

21 Oct 2020 Nikita Bhoota

This document summarizes a few key points related to the issue and should not be treated as a comprehensive summary. Investors are requested to refer the Red Herring Prospectus for further details regarding the issue, the issuer company and the risk factors before taking any investment decision. Please note that investment in securities is subject to risks including loss of principal amount and past performance is not indicative of future performance. Nothing herein constitutes an offer of securities for sale in any jurisdiction where it is unlawful to do so. This document is not intended to be an advertisement and does not constitute an invitation or form any part of any issue for sale or solicitation of an offer to subscribe for or purchase any securities and neither this document nor anything contained herein shall form the basis for any contract or commitment whatsoever.


Issue Opens- October 20, 2020
Issue Closes- October 22, 2020
Face Value: Rs.10
Price Band- Rs.32-33
Issue Size- Rs.518 cr (at upper price band)
Bid Lot- 450 equity shares
Issue Type: 100% Book building

 

% Shareholding

Pre IPO

Promoter and Promoter Group

95.5

Public

4.5

Source: RHP


Company Overview

Equitas Small Finance Bank (ESFB) is the largest SFB in India in terms of number of banking outlets, and second largest in terms of assets under management (AUM, 16% market share in India) and total deposits in Fiscal 2019 (Source: CRISIL Report). It offers a range of banking products and services with a focus on serving the financially unserved and underserved customer segments in India. Its assets products include provision of small business loans comprising LAPs, housing loans, agriculture loans to micro-entrepreneurs, microfinance to JLGs, used and new commercial vehicle loans, MSE loans, corporate loans and other loans including gold loans. On the liability side, it caters to mass and mass affluent individuals to whom they offer current accounts, salary accounts, savings accounts, and a variety of deposit accounts. As of June 30 2020, its percentage of gross NPAs to gross advances was 2.68%, while percentage of net NPAs to Net Advances was 1.48%. Its Gross Advances (including securitization/ IBPC) were Rs15,573cr and deposits were Rs11,787cr as of June 30, 2020. Secured Advances constituted 75.75% of the total gross advances (including IBPC issued) as on June 30, 2020.

Objective of the Offer:

The offer comprises of a Fresh Issue and an Offer for Sale. ESFB intends to raise fresh capital of Rs280cr which will be utilized towards augmenting the bank’s Tier – 1 capital base to meet its future capital requirements such as organic growth and expansion and to comply with regulatory requirements for enhanced capital base. ESFB shall not receive any proceeds from the offer for sale.

Financials

Cr.( except percentages)

FY18

FY19

FY20

Q1 FY21

Gross Advances (including securitization / IBPC)

7,937

11,703

15,367

15,573

Total Disbursements

5,809

8,578

9,911

564

Total Assets

13,301

15,763

19,315

20,892

Total Deposits

5,604

9,007

10,788

11,787

 

 

 

 

 

Total Income

1,102

1,435

1,778

434

Net Interest Income

861

1,152

1,495

404

PAT

32

211

244

58

 

 

 

 

 

Return on average equity (%)

1.57

9.85

9.84

8.32^

Return on average assets (%)

0.30

1.45

1.39

1.15^

Cost to income ratio (%)

79.97

70.30

66.38

67.27

GNPA (%)

2.68

2.53

2.72

2.68

NNPA (%)

1.46

1.44

1.66

1.48

 

 

 

 

 

CASA Ratio (%)

29.23

25.25

20.47

19.97

Retail term deposit to total term deposit ratio (%)

16.20

24.30

44.42

46.40

Source: RHP, 5paisa Research; ^on annualized basis

For additional information and risk factors please refer to the Red Herring Prospectus. Please note that this document is for information purpose only

Key Positives

Customer centric organization with a deep understanding of the unserved and underserved customer segments

ESFB’s strength lies in promoting financial inclusion within customer segments that are financially unserved and underserved in India. This enables the company to comply with RBI’s requirements for SFBs including meeting “priority sector” lending requirements. As of June 30, 2020, advances to the unserved and underserved segments represented 89.12% of its Gross Advances (including IBPC issued).

ESFB has gained a deep understanding of the market over the years that enables it to meet the financing requirements of potential customers. It undertakes research on various segments within these markets to understand their borrowing profile in the absence of formal documentation.

ESFB believes that the customers prefer a single source for multiple financial services, and it has accordingly customized a range of credit and non-credit products and services to address a variety of financing requirements like small-ticket recurring deposits to promote savings with in its customer segments and distribution of insurance policies like ‘hospital daily cash benefits’, an insurance product to cover emergency medical expenses of its customers.

It also develops products to match the growth cycle of target customer base. For instance, its microfinance customers tend to require micro-LAP loans, and as their enterprises mature, will be able to obtain MSE loans/ working capital loans.

Among the largest SFBs in India with a well-diversified asset portfolio

ESFB is the largest SFB in India in terms of number of banking outlets, as of March 31, 2019, and in Fiscal 2019 they recorded the fourth lowest yields indicating diversification away from microfinance (Source: CRISIL Report). ESFB has been able to successfully diversify its loan portfolio and significantly reduce dependence on microfinance business as compared to other microfinance companies that have converted to SFBs (Source: CRISIL Report).

It assesses the track record of existing customers to advance higher credit to meet their specific financial requirements, thereby further customizing few of its products. This approach has resulted in the growth of its gross secured loan product portfolio, which has grown at a CAGR of 48.35% from Rs5,265cr as of March 31, 2018 to Rs11,585cr as of March 31, 2020, and was Rs11,797cr as of June 30, 2020. Within its credit portfolio, small business loans (including housing loan) and vehicle finance product segments recorded significant growth with a CAGR of 53.34% and 29.62%, respectively, from March 31, 2018 to March 31, 2020.

The bank believes that it is relatively insulated from counter cyclical impacts across economic cycles owing to its diversified asset base and each of its product lines is well positioned to grow, creating a foundation of stability, sustainability and scalability for our operations.

Customized credit assessment procedures for effective credit risk management

ESFB applies different credit assessment procedures based on the products they offer. For instance, sanctioning small business loans involves telephonic checks with the potential customer, followed by in-person meetings by the senior loan officer to understand the business, cash flows and other parameters based on which a proposal is prepared. The senior loan officer’s proposal is scrutinized and in certain circumstances, reassessed to check for discrepancies, if any. For vehicle loans, they also undertake inspections of the vehicle through an independent expert, to verify registration information, condition of the vehicle and market value. They additionally apply a proprietary discounted cash flow model, which is adjusted based on the income profile of the customer and type of product. It also has risk management framework to identify, measure, monitor and manage credit, market and operational risks including IT security risk.

ESFB’s risk management and credit evaluation processes, together with its ability to evaluate risk, have enabled it to contain level of NPAs, restructured standard asset and special mention accounts category 2 levels. As of June 30, 2020, Gross NPAs were 2.68% of Gross Advances (including IBPC issued), and Net NPAs were 1.48% of Net Advances.

Key Risks

The continuing impacts of COVID-19 are highly unpredictable and could be significant, and may have an adverse effect on its business, operations and future financial performance.

ESFB is subject to stringent regulatory requirement including RBI’s SFB Licensing Guidelines as per which ESFB’s Promoter Equitas Holdings Limited is required to reduce its shareholding in ESFB to 40% on or prior to Sept 4, 2021.

Watch this video to know more about Equitas Small Finance Bank IPO -