Suryoday Small Finance Bank IPO: All You Need To Know
Suryoday Small Finance Bank’s management including MD & CEO R Baskar Babu (middle) attend the bank’s launch in Mumbai. (Photographer: Jyotiprakash Rout/BloombergQuint)

Suryoday Small Finance Bank IPO: All You Need To Know

Four-year-old Suryoday Small Finance Bank is set to launch its initial public offering to raise Rs 580 crore. The offering will help the bank meet regulatory listing requirements.

The bank will look to sell 81.5 lakh shares as part of the offering, with a further offer for sale of up to 1.09 crore shares, adding up to 17.99% of paid-up equity. Employees of the bank will have 5 lakh shares reserved for them, issued at a discount of Rs 30 per share. The shares will be issued within a price band of Rs 303-305 apiece, with the small finance bank valued at around Rs 3,200 crore at the upper end of the price band.

The issue will be open between March 17 and March 19.

Key Details:

  • Issue opens on: March 17.
  • Issue closes on: March 19.
  • Face value: Rs 10 a share.
  • Shares on offer: Fresh issue of 81.5 lakh shares, with an offer for sale of up to 1.09 crore shares.
  • Minimum bid size: 49 shares.
  • Listing on: BSE and NSE.
  • Book running lead managers: Axis Capital, ICICI Securities, IIFL Securities, SBI Capital Markets.

Suryoday Small Finance Bank has already completed a pre-IPO placement to raise around Rs 150 crore at a price of Rs 291.75 per share from investors including SBI Life Insurance, Axis Flexi Cap Fund, Axis Equity Hybrid Fund and Kiran Vyapar Ltd. It also raised Rs 170 crore via anchor investors at a price of Rs 305 per share. The anchor investors mutual funds and insurance companies, among others.

Purpose

According to the bank’s red herring prospectus, the fund raising will help Suryoday Small Finance Bank to augment its capital base. As of December 31, the bank’s capital adequacy ratio stood at 41.17%, where Tier-1 capital constituted 34.3%.

Further, small finance banks are required to list within three years of reaching a net worth of Rs 500 crore, as per the Reserve Bank of India (RBI) guidelines governing these lenders. The bank had crossed the milestone in November 2017, making it necessary to list by November 2020.

The bank had applied to the RBI for an extension of timeline for listing till May 31, 2021. However, the RBI rejected the request and asked it to complete its listing at the earliest, according to the prospectus.

Business

Incorporated as Suryoday Micro Finance Pvt Ltd in 2008, the lender was granted a small finance bank license in 2016. A year later, it started commercial operations as per the RBI’s guidelines. As of December 31, the bank had a customer base of 14.4 lakh, with 4,770 employees and 554 banking outlets.

Total advances at the end of the third quarter stood at Rs 3,782 crore, where metropolitan and urban areas contributed to nearly 65% of the loan book. Its lending business is spread across microfinance, commercial vehicle loans, affordable housing loans, small business loans and unsecured loans to micro, small and medium enterprises (MSMEs). Suryoday Small Finance Bank’s net unsecured loan book has fallen to 74.59% as of December 31, as compared with 94.81% when it commenced its operations in fiscal 2017-18.

“We have also streamlined our internal processes for credit evaluation, internal scoring and credit decisioning and have integrated them with our technology platform. Our focus is primarily to build a secured loan portfolio as part of our non-JLG (joint lending group) businesses,” the bank said in its prospectus.

The bank’s outstanding deposits stood at Rs 3,344 crore, where low cost current account savings account (CASA) deposits constituted 13.32%. Overall retail deposits formed 72.4% of the total deposits as of December 31, the bank said in its red herring prospectus. About 73% of the bank’s deposits came from Maharashtra and Tamil Nadu alone.

In order to grow our retail deposits, the bank has set up a dedicated team for the acquisition of retail deposits across regions and a product development team to enhance the features of its existing products and develop new products, the lender said. “Our strategy will be to build relationships across various customer segments including with senior citizens, NRIs (non-resident Indians), educational institutions, NBFCs (non-banking finance companies), corporates and co-operative banks.”

Asset Quality

Reported gross non-performing asset ratio was at 0.78% as of December 31, as compared with 2.25% as of September 30. The net NPA ratio stood at 0.33% in the third quarter, down 24 basis points sequentially.

However, the bad loan ratios remained low largely because of the Supreme Court’s interim order in the interest-on-interest case, where banks were not allowed to recognise fresh bad loans after September 1.

Without the Supreme Court’s order, the bank’s gross NPA ratio would be at 9.28% and net NPA ratio would be at 5.38% at the end of the third quarter.

Risk Factors

According to Suryoday Small Finance Bank, a fall in collections is a key risk, as most of the collections are still cash-based and require a physical presence by its representatives. Collection efficiency in three states — Tamil Nadu, Maharashtra and Odisha, are key as most of the bank’s lending business comes from here.

In the month of December, the inclusive finance loans, which form the largest segment of loans for the bank’s book, showed a collection efficiency of 82.04%, commercial vehicle loans were at 85.85%, micro business loans at 82.13% and affordable housing loans recorded a 96.5% efficiency in collections.

The fall in collection efficiency would directly lead to a fall in asset quality. The bank’s borrowers are largely small traders, individuals with micro-enterprises and those from the unorganised sector, which have been the most affected by the Covid-19 pandemic.

“While many borrowers had opted for the moratoriums available and most of the customers started paying instalments after moratorium period was over, there can be no assurance that customers impacted due to COVID-19 will continue to make payments on a continuing basis,” the bank said in its prospectus.

According to Suryoday Small Finance Bank, 29.84% of its total deposits came from its 20 largest depositors as of December 31. Factors such as drop in service quality, change in policy or heightened competition from other banks could result in these depositors withdrawing their funds. Reduction or loss of such deposits exposes the bank to funding risk, which could in turn adversely affect the bank’s financial performance and results of operations.

The bank’s operational expenses are less variable in nature and may not come down with falling revenues, which may have an impact on earnings per share. These include expenses such as deprecation, employee benefits and other costs associated with maintaining banking outlets. The bank may not be able to immediately reduce them, or may take a long term view on reducing them, it said.

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