Ujjivan Small Finance Bank IPO: Should You Invest?

A small finance bank is just like any other bank. It takes deposits and lends money. It is also under the purview of RBI. However, the difference between a ‘bank’ and a ‘small finance bank’ is not that small (pun intended).

Small Finance Banks aim largely at financial inclusion. They focus on lending on to small borrowers, unorganized sector, small & marginal farmers, and other microfinance lending activities. They also require complying with a 75% priority sector lending norm.

Small Finance Banks have been relatively a new experiment in India. Have they been successful or not? Ujjivan Small Finance Bank is an example of it.

Ujjivan Financial Services: The NBFC

Ujjivan Small Finance Bank started as a Non-Banking Financial Company ‘Ujjivan Financial Services’ in 2005 in Bengaluru. Its objective was always clear to expand itself into a bank. Of course, the banks always have a wider range of services to offer as compared to any NBFC. Its aim was to bring more unorganized savings to organized fold.

However, the RBI norms on opening the banks are much stricter. Moreover, there were no provisions or nomenclature like ‘Small Finance Banks’ until 2014. Hence, Ujjivan Financial Services chose to focus on microfinance activities.

Ujjivan Small Finance Bank

If Ujjivan Small Finance Bank IPO becomes a success today, November 27, 2014, will be remembered as a landmark date. RBI announced the guidelines and application procedure for the 'Small Finance Banks.' The term earlier unheard of in the Indian financial system was a buzzword overnight.

Two main guidelines of Small Finance Banks were that they should have a minimum paid-up capital of 100 crores, which is much less than the regular banks. Secondly, they will have the term 'Small Finance Bank' in their name.

Ujjivan's prayers from 2005 were answered ten years later. Out of the 72 applicants, Ujjivan Financial Services was amongst the ten successful applicants who got the license. It would no more be a microfinance institution. It would now become 'Ujjivan Small Finance Bank'.

Ujjivan has since then provided a full range of banking services deposits, loans, and digital banking to its customers that largely form of economically active poor.

From 'Small Finance Bank' to a big IPO

Ujjivan Small Finance Bank IPO has finally arrived. Many experts already saw it coming. After commencing operations as an SFB, Ujjivan has expanded to over 500 branches across 24 states. Its lending has ballooned to Rs. 11,000 crores (from Rs. 6,000 crores) in the past two years.

Its deposits have also seen a significant rise to Rs. 10,000 crores (from Rs. 7,000 crores) during the same period. Its profit after tax (PAT) stood at 190 crores in FY2019 and NPAs at a mere 0.83%

Its certificate for deposits has been catered to the A1+ rating by CRISIL.

The Contemporaries

Ujjivan has put in many expectations from this IPO. They wish to raise as much as 750 crores from this IPO, out of which 250 crores have been private placements. It has priced it at Rs. 36-37 per share, for 400 shares each lot.

However, Ujjivan SFB is not the first of its kind. AU Small Finance Bank successfully listed itself in 2017. An older player of the game, its issue price was Rs. 358 per share and it values Rs. 832 today! Its P/BV on the listing was 5.1 and it was much higher than others of its kind were. Today it marks a P/BV of 11.92, which is quite consistent with its market price. On the other hand, Ujjivan Small Finance Bank today on the verge of going public, has a P/BV of 2.2.

Still, being one of the few attractive IPOs in the time when investors are yearning for an opportunity, Ujjivan seems to gain fair traction. The rise in the price is obviously dependent on how the company fares in the longer run.

Equitas Small Finance Bank is the next in the queue planning an IPO in March 2020.

The Road Ahead

On the day of Ujjivan gaining the SFB license, they professed their dream of becoming a universal bank someday. With all the right numbers on the cards, they bet this dream on this IPO.

However, it has its set of challenges, as well. Its experience as a bank is only a few years; hence, its evaluation, as a performer would be too early. Its micro-financing nature of loans lacks collateral-backed loans. Therefore, the loan portfolio stands risky, especially under the current NBFC crisis.

Backing on its good run-up, Ujjivan Small Finance Bank has come up with a lot of new products. Their profitability and longevity would remain a question for some time.

Overall, it is the investor’s own wisdom and the respective yardstick with which the story would be judged.