Equitas Small Finance Bank Ltd. (Information Note)

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.