23739What problems are there with recycled mobile numbers?

If financial inclusion is the flavour of the season for policymakers, can small finance banks be far behind? Of the four banks — AU Small Finance Bank, Equitas, Ujjivan and Sarvoday — those who are taking deliveries outnumber those who are not.

The price of two are higher than the issue price of two banks, while two are trading lower.

AU Small Finance Bank, the IPO of which hit the market in end-June 2017, has a current market price of Rs 1,250 against an offer price of 355-358 per share.

Equitas Small Finance Bank hit the market in October 20-22 last year. While its offer price was Rs 33, it is trading at Rs 56.55. On Friday, 54.9% of the buyers took delivery of the shares.

Ujjivan Small Finance Bank IPO hit the market in early December 2019 at a price of Rs 36-37. It traded at Rs 30.50 on Friday but 51.34% buyers took deliveries.

Suryoday Small Finance Bank came out with its IPO in March 2021. Though the offer price was Rs 305 a share, it traded at Rs 266.55 on April 9 when 51.84% of the investors took delivery.

Two more small finance banks have filed draft prospectus with the Sebi for raising capital. These are Jana Small Finance Bank and Utkarsh Small Finance Bank. While Jana wants to mop up Rs Rs 700 crore, Utkarsh Small Finance Bank, a Varanasi-based entity, wants to raise Rs 1,350 crore from the market.

If small finance banks are quietly attracting the attention of investors, it is not without reason.

In an article “Small Finance Banks: Balancing Financial Inclusion and Viability” in the January 2021 bulletin of the Reserve Bank of India it was observed, “Although the deposit base of SFBs has been on a striking rise, their percentage of CASA remains lower than other SCBs. An increase in the CASA base can augur well towards lowering the cost of funds for these banks, going forward. The return on funds of SFBs has been higher than other SCBs.”

(CASA stands for Current Account Savings Account. Banks offer negligible interest on the former and an average return to depositors on savings account.)

The article also mentioned, “Similarly, spread, which decides the return on funds, has been much higher. Consequently, the profitability of these institutions measured by RoA is much higher than their peers in the banking segment. It is, however, lower than NBFC-MFIs, their counterparts in the non-banking segment. The NPA ratio of SFBs has been moderate since their inception, underlining a healthy asset quality. This may be expected as these banks do not suffer from a legacy of NPAs as other SCBs. However, their low NPA ratio also reflects better management of credit risk despite serving a small-sized clientele.”

The central bank created the small finance banks as a category a few years ago to fortify its inclusive reforms.

“Investors have clearly noted the revenue visibility of the SFBs, which are gradually coming of age. The financial inclusion story is far from over in India, and these smaller banks are among the central bank’s armoury and the need for spreading SFBs networks is being felt more acutely than ever before,” said Nilanjan Dey, director, Wishlist Capital Advisors.

Small finance banks are designed to fund the financial needs of the underprivileged sections through basic banking activities of lending money and offering deposits. Their typical clients include small farmers, micro and small industries, small business units in rural/semi-urban areas. These entities were established to provide banking facilities to the unbanked population at the base of the financial pyramid.

SFBs have been nimble-footed in their management and use of technology.

A very significant feature has been the absence of non-performing assets and healthy asset quality since the banks came up recently. Union finance minister Arun Jaitley announced in the budget for 2014-15 that these entities would be set up.

These banks can take deposits and disburse loans, distribute mutual funds and insurance products. They have to lend three-fourths of their total adjusted net bank credit to priority sector.

These banks are also making their way into lesser-known indices such as NSE Small Cap 250. This is also going to attract the attention of investors.