Jana Small Finance Bank IPO Prospectus Reveals Troubled Past
A customer holds an Indian one-hundred rupee banknote as she waits to buy fish at a market stall in India. (Photographer: Dhiraj Singh/Bloomberg)

Jana Small Finance Bank IPO Prospectus Reveals Troubled Past

Jana Small Finance Bank, which has filed its draft prospectus to go public, saw more than four-tenths of its loan book turn bad during the year ended March 2018, which the lender blamed on demonetisation. An aggressive clean up of its books, including writing -off of stressed assets followed, bringing bad loans down to under 3% as of September 2020.

According to financial information included in the draft red herring prospectus, the bank’s gross non-performing assets ratio rose to 42.2% as of March 2018. Thereafter, the lender brought down bad loans to 8% as of March 2019 and 1.4% as of March 2020.

As of September 2020, the bank’s gross NPA ratio was at 2.72%. Accounting for loans that weren’t classified as NPAs due to a Supreme Court order, the gross NPA ratio would have been at 2.95%, the bank said. In addition to loans overdue by over 90 days, the bank had another Rs 137.8 crore in accounts under the special mention categories, which includes loans overdue by up to 90 days.

The sharp rise in bad loans and necessary provisions meant the lender reported large losses for two consecutive years. In FY18, Jana Small Finance Bank had a net loss of Rs 2,411 crore and in FY19 it had a net loss of Rs 1,949 crore. In FY20, the bank returned to a profit of Rs 30 crore.

Jana Small Finance Bank’s upcoming IPO will include a fresh issue of equity shares of up to Rs 700 crore and an offer for sale of up to 9.25 million shares. The bank may consider a pre-IPO placement of up to Rs 500 crore, including by way of a proposed further issue to promoters, the prospectus said.

Jana Small Finance Bank was one of the ten micro lenders that received a small finance bank licence in 2015 when the new differentiated category of lenders was introduced. It started operations in 2018.

The bank, according to RBI’s rules, was required to list by March 27, 2021. “Our bank applied to the RBI for an extension of the listing timeline till March 28, 2022,” the prospectus said. “However, the RBI didn’t accede to the request of our bank.”

The bank was founded by veteran banker Ramesh Ramanathan, who is also its part-time chairman and non-executive director, while Ajay Kanwal is managing director and chief executive officer.

What Happened In 2018?

According to the bank’s prospectus, demonetisation impacted its books significantly.

“The unavailability of currency in circulation resulting from demonetisation severely affected the repayment of our loans by many of our customers, particularly our group loan customers, which led to a large increase in NPAs and provisions and write-offs for NPAs for the six months ended Sept. 30, 2019, and fiscal 2019 and 2018, resulting in losses for the six months ended Sept. 30, 2019, and fiscal 2019 and 2018,” the bank said.

In the year ending March 2019, the bank wrote off Rs 2,643 crore in bad loans and in the following year it wrote off another Rs 295 crore. Provision for NPAs and bad debts written off were at Rs 1,364 crore and Rs 1,472 crore for fiscals 2019 and 2018, respectively, the lender said.

Since then, the bank said it has introduced new credit policies and governance procedures, increased focus on collections, and raised the share of secured advances to reduce the risk of loan losses.

To help clean-up the bank’s books, its shareholders, including TPG, HarbourVest group, Amansa Capital, Morgan Stanley and Hero Ventures, infused capital. They invested Rs 1,636 crore in FY18 and Rs 936 crore in FY19. A further investment of Rs 338 crore came in FY20.

Beyond The Clean-Up

Over the last two years the bank has tried to increase the share of secured assets in its books. However, its low cost current account and saving account (CASA) deposits are among the lowest across small finance banks.

The share of unsecured loans has come down to 71% as of September 2020 compared to nearly 90% as of March 2019. The business of micro lending is largely unsecured.

Based on product categories, 74.7% of its advances are microfinance loans, while MSME loans and mortgage loans make up the next two largest segments.

The bank’s CASA ratio remains low at 9.75%, which, the DRHP shows, is the lowest among listed small finance banks. When combined with retail term deposits, the ratio improves in comparison to the industry and stands at 69%. Its cost of funds were at 9.12% as of the September 2020.

The lender’s net interest income for the six months ended September 2020 stood at Rs 651.6 crore compared to Rs 418.2 crore a year ago. Its net interest margin stands at 9.36%.

Regulatory Action

The DRHP also showed that the bank has received a show cause notice dated March 10, 2021 from the Reserve Bank of India for non-compliance of directions governing interest rates chargeable on deposits.

The show cause notice alleged that the bank had paid interest on 1,519 bulk deposit accounts opened in the year at rates that differed from its scheduled interest rates and allowed negotiated deposit rates to be offered by certain officials of the bank. “These matters were highlighted by the RBI earlier in its annual financial inspection of our bank for fiscal 2019,” the DRHP

The lender said it has responded to the RBI’s complaints, highlighting the possibility of RBI action as part of its risk factors.

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