Uttkarsh Bank – A Hidden Gem in Micro-Finance

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A few days ago, another Small Finance Bank (SFB), Uttkarsh Bank, filed its IPO papers. Whenever a new bank (or any company) files this document, you get a good peak into its business overview, how it makes money, what are its costs, risks and how good (or bad) its financials are.

So let’s dive in.

Disclaimer: I will mostly write about the unique selling point of Uttkarsh Bank today. For a background on Small Finance Banks, please read my previous post here.

Although I’ll mostly be just picking up interesting stuff from the document itself, it’s important to realise these are written by research houses which are known to be paid by the company itself, so expect bias.

Here’s an Example

There are about 10 SFBs in the country today. When Ujjivan or Equitas SFB filed their IPO papers back in 2019, this is the image they used to show their market share:

Industry AUM Share of Small Finance Bank

As I am going through Uttkarsh Bank’s document, here’s the same picture but with a different heading:

Notice the difference? The same market share image suddenly changed from

Top 3 players account for 64% of industry AUM

to

Top 6 players account for 86% of the industry AUM

It’s all about the narrative, eh? 🙂

A Bit of Uttkarsh Bank History

Utkarsh’s promoter UCL (Utkarsh CoreInvest Limited) started operations ten years ago as a NBFC.

Starting out in the micro finance space, it aimed to provide credit to the unserved and underserved segments in Varanasi, UP, where it is headquartered.

Over the years, it has strategically grown to expand in several other states where they felt micro finance could be implemented efficiently.

In 2015, UCL received RBI approval to turn itself into a Small Finance Bank.

“We were included in the second schedule to the RBI Act as a scheduled commercial bank pursuant to a notification dated October 4, 2017 issued by the RBI and published in the Gazette of India (Part III – Section 4) dated November 7, 2017.” (Read about all the implications of being included in the second schedule here)

As of today, this is Uttkarsh Bank’s presence in India:

Uttkarsh Bank Presence in India

According to regulations, they had to list by June 2021. Now that IPO season is picking up some steam, they’ve released the necessary documents – expect an April IPO if all goes well.

Management Analysis

Uttkarsh Small Finance Bank is headed by Mr. Govind Singh, who has two decades of prior experience in ICICI Bank (in the Rural and Micro Credit Segment) and Axis Bank before he joined UCL.

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There weren’t many written interviews that seemed interesting, but a couple of video interviews pointed towards the bank having extremely good risk controls since Day 1.

This is visible through the result of an excellent asset quality (as you’d read later).

Also, they were keen to cross-sell and up-sell products to the same set of low-income customers so that they could lead better lives (particular about not giving loans for mobile phones or other similar things just to increase book size).

Most of these insights were taken when Utkarsh was a micro finance institute primarily. I couldn’t find a good write-up explaining their turnaround from losses during demonitization (when it was a SFB) to being profitable today. Here is a decent interview I found from 2019 though.

So How does Uttkarsh Bank Actually Compare to its Peers?

Uttkarsh Bank Peers Comparison
  • According to the document, “Utkarsh has the highest proportion of bulk term deposits in total deposits at 51.8% amongst the peer set.”

    Honestly, I’m not too sure if that’s a good thing. If you recall the regulation, 50% of the portfolio of SFBs should comprise loans of upto ₹25 lakh. This is primarily enforced to meet the objective of lifting up small entrepreneurs, farmers, migrants.

    In fact, Utkarsh has the second highest concentration of top 20 accounts – which essentially means, it has lent a LOT of money to very FEW people – kind of opposite to a SFB’s objective.

  • Do note that this may or may not be a cause for concern – it all depends on how credit-worthy the top borrowers are.
  • Business per employee (measured through loans and deposits) is actually a good measure of how efficient a bank is. Seeing the chart below, it seems Capital, ESAF and AU are leading the pack here. (Ignore Bandhan here – it became a universal bank from a NBFC-MFI years ago)
Operating Efficiency of SFBs
  • Here’s how the different SFB stack up against each other in terms of product portfolio. Since most of them have converted from a Micro Finance Institution (MFI), you will see a heavy concentration in that segment. This is where AU and Equitas have a significant advantage. Of course, that doesn’t mean its a disadvantage either. It all depends on how efficient your collections are (loan repayments and pre-payments). Although Utkarsh does state this:

We have been diversifying our product portfolio to include non-micro banking loans allowing us to reduce dependence on our microfinance business and grow our secured loan portfolio.

  • Profitability: So there are a couple of things where Utkarsh is actually leading the pack here: highest return on equity (RoE) and second-highest return on assets (RoA). Although it’s not compared in the image below, it also has the lowest bad loan ratio (gross NPA: 0.7% & net NPA: 0.18%). These are the benefits of having good risk controls which I described earlier.

What are the Risks?

Since Uttkarsh is predominantly in the Micro-Finance space, any changes to this particular industry will have a major impact on Utkarsh as well.

Although the industry has faced multiple challenges since 2008, it has always jumped back. Having said that, the true impact of Covid-19 can only be assessed a couple of quarters down the line.

Let’s understand the MFI segment a bit – think low-income, weak credit profile. They are the ones who have minimum savings. So when lost their livelihood during the pandemic, they couldn’t repay their loans.

Approximately 70% to 80% of the micro loan borrowers sought moratorium under the ‘COVID-19- Regulatory Package’ announced by the RBI.

Another downside of the pandemic is that bank agents couldn’t recollect the dues on ground, due to lockdowns across the country.

…operations of MFIs are field-intensive, involving high personal interactions, such as, home visits and physical collection of cash.

Can you imagine that nationwide collections had gone down to 0% in April 2020? It bounced back to ~70% in July 2020 and ~90% in December 2020.

Opportunity for Uttkarsh Bank

Keeping these things in mind, it is imperative that SFBs look to increase the pie to identify new opportunities. As you can see from the image below, there are a lot of states which are under penetrated right now (shown in green).

It is good that Utkarsh is predominantly present in under-penetrated (Uttar Pradesh) and moderately penetrated states (Bihar and Jharkhand) but it would serve it well to slow establish itself in the neighbouring under/semi penetrated regions as well.

Closing Thoughts

I’ll leave the financials and future prospects to the equity research experts, but as of now, it seems that Utkarsh still needs to prove itself as a SFB in order to make people believe and invest in its future potential.

Hopefully, this is the first place you’re reading about it – As I’m not authorised to shell out financial advice, I’ll update you guys closer to the listing date, with resources from people who actually guide people on IPOs for a living.

Also Read: Scuttle-butt Story of a 10-Bagger Micro-cap Stock

That’s it for this week. If you want me to cover a particular news, want to get featured, write a guest post or wanna simply say hi, do reach out to me at anirudha@bankonbasak.com or LinkedIN or TwitterMeanwhile, like this post and share it around?

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Anirudha Basak

Anirudha Basak

Anirudha is immensely passionate about finance, economy, businesses, personal finance, and of course, banking. He has an MBA in Finance from XIMB.
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