Sector: Financials | September 2016
12 Annual Global Investor Conference
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SFB Panel Discussion
Opportunities and challenges for small finance banks
Key takeaways from the panel discussion at AGIC 2016
To facilitate financial inclusion and banking penetration in India, the Reserve Bank of
India (RBI) last year granted small finance bank (SFB) licenses to 10 entities, eight of
which were micro finance institutions (MFIs). At our 12 AGIC, a panel of five of these
license awardees discussed the transition from being an NBFC to becoming an SFB, as
well as opportunities and challenges ahead for them.
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The panel members included Mr. Sanjay Agarwal (Au Financiers), Mr. P.N. Vasudevan
(Equitas Holdings), Mr. V.S. Radhakrishnan (Janalakshmi Financial Services), Mr.
Baskar Babu (Suryoday Microfinance) and Mr. Samit Ghosh (Ujjivan Financial
Services).
For the first time, in FY16, MFIs garnered more accounts in urban than in rural India.
Until now, MFIs have focused mainly on building the asset side of the business, serving
the unbanked population in the country; however, after beginning banking
operations, they can open branches and build their retail liability franchise.
Most of the SFBs are focusing on a) building branch network for garnering retail
liabilities, b) diversifying their loan book and c) making best use of technology to
reduce cost of operations. According to the panelists, HR and adjusting to new
regulations remain the key concerns.
Mr. P.N. Vasudevan
(Equitas Holdings)
Mr. Sanjay Agarwal
(Au Financiers)
Mr. V.S. Radhakrishnan
(Janalakshmi Financial
Services)
Mr. Baskar Babu
(Suryoday
Microfinance)
Mr. Samit Ghosh
(Ujjivan Financial
Services)
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com);
+91 22 3982 5415/ Sunesh Khanna (Sunesh.Khanna@MotilalOswal.com); 91 22 3982 5521
Krishnan ASV
(A.Krishnan@MotilalOswal.com); +9122 30102603/Rahul
Gupta
(Rahul.PGupta@MotilalOswal.com); +9122 39825505
September 2016
1
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Financials | SFB Panel Discussion
12 Annual Global Investor Conference
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Huge untapped opportunity – asset growth not a constraint
The market is hugely under-penetrated and the opportunity size is expected to be as
big as INR30t, or 40% of the banking sector. Based on statistics, there are ~70m
enterprises in India. However, in reality, the number could be much higher at ~100m
and not more than 5% of these enterprises are bank-funded. Moreover, given that
85-90% of bank funding is availed by the top 100,000 borrowers (forming only 0.1%
of all borrowers), the growth potential remains significant. MFIs are not only
catering to the unbanked and rural population, but are also active in serving the
urban poor. Mr. Radhakrishnan highlighted the point from the Planning Commission
report that there is a shortage of 30m affordable homes in India. Hence, the market
is not limited only to MFIs for these players, but also to SMEs and housing segments.
Sticky asset pricing will help to maintain margins
Upon transition, we expect SFBs to replace bank liabilities with bulk deposits as
building retail liabilities will take time. While cost of bulk deposits (although lower
than bank liabilities due to no intermediation cost) and regulatory requirements
(CRR, SLR, etc.) is margin-dilutive, sticky asset pricing will help to offset margin
pressure. Further, upon conversion to SFB, spread cap limit (like NBFC – MFI of 10%)
will not be applicable. Customer base is not rate-sensitive, but more driven by
service delivery.
SFBs initially will rely on
bulk deposits to fund assets
and then eventually move
to retail deposits.
Garnering retail deposits a key challenge
Every panelist in the discussion had a view that raising retail liabilities will be a
challenge as it depends on various factors and not just direct competition from the
already established banks. Customers currently look at savings deposits as a
custodian service and not as a savings product. This mindset needs to change, which
will only happen over a period of time. Most of the panelists are still trying to figure
out ways to reduce the cost of transaction of this high-volume, low-ticket size
liability customer base.
Ease of doing business and
superior customer service
will define the success of
small finance banks.
Trust, ease of operation and timely service – a key requirement
Customers currently are unsure of success of many banking products. They usually
try to avoid visiting branches of banks as sales teams often pitch multiple products,
which makes them uncomfortable. Moreover, the processes involved in banking
(filling up of multiple forms, KYC, etc.) are very complex compared to those at
local/unorganized entities. More than interest rates, the target customer base is
inclined toward service delivery and comfort level in terms of transactions. A change
in mindset will happen over a period of time, which should help SFBs grow their
deposits business.
Innovative solutions at play – early days
Lack of trust and difficulty in understanding products are largely due to poor
financial literacy – the SFB licensees very well understand this fact and have been
trying to train the customers. To convince customers that SFBs are better placed
versus unorganized establishments in terms of delivering on service and trust, some
MFIs have come up with innovative ideas. For example, Janalakshmi offers prepaid
September 2016
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Financials | SFB Panel Discussion
12 Annual Global Investor Conference
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loan cards to its customers and collects daily savings from them; and Equitas offered
a ‘piggy-bank’ to 2.5m customers ~4-5 months back – the savings can later be
transferred their accounts once Equitas begins its banking business.
There is a need for proper
training and change in
mindset of employees to
cater to the target
customer base, which is
different from the urban
population.
Different business model – HR a key challenge
Key concern for MFIs is changing the mindset of employees. The ‘old-banking’ habit
has to change and employees need to become more customer-oriented and
technological savvy given the changing banking environment in the country.
Customer touch points would be the key determinant of the trust factor between
banks and customers, and hence employees need to deal with empathy.
SFBs are making investments to train their employees. Mr. Vasudevan was of the
view that the biggest challenge could be providing service on a consistent basis and
this would define the sustainability of the franchise.
Technology is not a
differentiator but an
‘enabler,’ which should help
in delivering consistent and
seamless customer service.
Technology solutions have to be customized
Technology is just an enabler of consistent and seamless service delivery. This is
because it is difficult for banks to remain unique in terms of technology as it can be
easily emulated by competitors. Technology has to be adopted keeping in mind the
needs of customers. For example, while benefits of ATMs are appreciated, many
customers find it difficult to access ATMs due to multiple options and buttons. This
makes case for biometric ATMs for easy transaction experience. Also, SFB license
awardees need to incur huge one-time capex of building IT infrastructure (like
adopting core banking applications), which might hurt their profitability in the
medium term. Currently, MFIs employ an e-KYC model for customer verification
using ‘Aadhar’ cards. Mr. Ghosh mentioned about additional costs that could be
incurred if SFBs had to follow central KYC policies on a retrospective basis.
Branches – awaiting regulatory clarity
As per regulatory requirements, SFBs have to open 25% of the branches in
unbanked geographies of the country. This poses two challenges for the business
model: 1) MFIs currently have less and small branches, as service delivery is more
driven by a ‘door-step’ model. If these service stops/small branches are not
considered as banking branches, then adding new branches means additional costs
and loss of USP of ‘low-cost’ branches. 2) Technology plays an important role in the
business, and there is still uncertainty around reliable internet connection in these
unbanked regions. We will need to wait and watch for regulators’ view on these
concerns and how things pan out over a period of time.
Summary
We believe SFBs are likely to face numerous challenges in the initial years of banking
operations, like adapting to banking technology, raising retail deposits, adding new
branches and training employees. However, given their good track record of
operating in the under-penetrated geographies of the country, we believe they can
survive the initial operating pain in order to gain from the immense opportunities in
the ensuing years.
September 2016
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Financials | SFB Panel Discussion
12 Annual Global Investor Conference
Exhibit 1:
AUM and AUM growth
AUM (INR Bn)
173
115
82
60
7
44
194
AUM Growth (YoY, %), RHS
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Janalakshmi is the largest
MFI in terms of AUM and is
growing at a fast pace.
102
65
7
57
32
43
53
1
65
2
115
78 78
3
10 21 37 110
11 16 33 54
11 15 21 33
3
6
10
Janalakshmi
UFS
Equitas
Suryoday
Source: MFIN, Company, MOSL
Exhibit 2:
Disbursements and disbursement growth
167
111
73
42 37
4 11 24 41 115
Disbursements (INR Bn)
179
106
53
73
31
41 49
1
40
2
4
6 13
Disbursements Growth (YoY, %), RHS
111
79
96
11 15 21 43 66
7 11 15 21 32
Janalakshmi
UFS
Equitas
Suryoday
Source: MFIN, Company, MOSL
As microfinance NBFCs
mature and get into small
finance banking business,
their productivity will
stabilize.
Exhibit 3:
Productivity comparison
GLP Per Employee (INR Mn)
Clients Per Employee, RHS
540 567
310 321
596 585
489
300
347
384 373
238
275 278
514
400 389 430
360 389
3.5 4.8 5.6 6.0 11.6
2.0 3.1 3.5 4.6 6.7
3.3 4.8 4.9 5.5 6.2
3.7 3.8 5.1 4.3 6.2
Janalakshmi
UFS
Equitas
Suryoday
Source: MFIN, Company, MOSL
September 2016
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Financials | SFB Panel Discussion
12 Annual Global Investor Conference
Exhibit 4:
Financials: Valuation metrics
Rating
66
CMP
(INR)
272
1,270
602
806
1,253
1,190
64
72
121
78
24
Mcap
EPS (INR)
P/E (x)
BV (INR)
P/BV (x)
RoA (%)
RoE (%)
FY17 FY18
10.6 11.3
18.9 19.6
13.8 14.4
14.2 15.4
22.0 23.1
16.2 17.6
7.9
9.1
8.0
9.0
11.3 11.7
12.7 13.7
10.7 11.7
7.9
5.7
-4.6
9.3
5.2
7.4
4.2
8.5
2.3
9.5
6.5
8.7
12.1
6.8
11.8
5.8
10.1
6.2
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(USDb) FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18 FY17 FY18
ICICIBC*
Buy
23.9
17.2 19.9 12.4
9.7
144 158 1.42 1.22 1.13 1.17
HDFCB
Buy
48.6
58.4 70.2 21.7 18.1 332 386 3.82 3.29 1.90 1.89
AXSB
Buy
21.7
31.8 37.4 18.9 16.1 243 274 2.48 2.20 1.32 1.31
KMB*
Buy
22.4
26.8 34.0 30.1 23.7 207 240 3.89 3.36 1.61 1.82
YES
Buy
8.0
78.8 99.2 15.9 12.6 390 469 3.21 2.67 1.80 1.84
IIB
Buy
10.7
50.5 63.8 23.6 18.7 334 389 3.56 3.06 1.92 1.96
IDFC Bk
Buy
3.3
3.3
4.0
19.7 16.0
43
46
1.50 1.40 1.19 1.08
FB
Buy
1.9
3.9
4.7
18.5 15.5
50
54
1.45 1.35 0.67 0.67
DCBB
Buy
0.5
7.4
8.6
16.5 14.1
69
78
1.76 1.57 0.98 0.93
JKBK
Neutral
0.6
17.6 21.2
4.4
3.7
146 162 0.53 0.48 0.99 1.05
SIB
Buy
0.5
3.1
3.7
7.8
6.5
30
33
0.80 0.73 0.61 0.64
Private Aggregate
142.2
20.8 17.4
2.77 2.46
SBIN (cons)*
Buy
258
30.3
14.7 24.3 17.5 10.6 234 253 1.21 1.10 0.47 0.54
PNB
Neutral
142
4.2
10.8 12.8 13.1 11.0 193 204 0.73 0.69 0.31 0.34
BOI
Neutral
121
1.7
-10.8 21.6 -11.3 5.6
239 255 0.51 0.48 -0.16 0.29
BOB
Buy
168
5.9
14.1 20.0 11.9
8.4
157 173 1.07 0.98 0.47 0.60
CBK
Neutral
312
2.6
25.4 34.8 12.3
9.0
497 524 0.63 0.59 0.24 0.30
UNBK
Buy
145
1.5
22.4 39.1
6.5
3.7
314 348 0.46 0.42 0.37 0.58
OBC
Neutral
130
0.7
16.7 24.2
7.8
5.4
410 428 0.32 0.30 0.23 0.30
INBK
Buy
218
1.6
24.8 31.4
8.8
6.9
300 324 0.73 0.67 0.56 0.64
ANDB
Buy
61
1.9
2.9
8.2
20.6
7.4
129 136 0.47 0.45 0.15 0.39
Public Aggregate
50.4
15.8 10.3
0.80 0.76
Banks Aggregate
192.6
19.2 14.8
1.68 1.55
HDFC*
Buy
1,393
33.3
34.6 37.9 28.2 22.4 194 217 4.38 3.46 1.85 1.83
LICHF
Buy
572
4.4
40.4 50.1 14.2 11.4 214 254 2.68 2.25 1.52 1.56
IHFL
Buy
793
5.1
68.2 84.0 11.6
9.4
280 315 2.83 2.52 3.74 3.78
GRHF
Buy
313
1.7
8.3 10.7 37.6 29.4
28
35 11.03 8.87 2.33 2.34
REPCO
Buy
830
0.8
30.4 39.7 27.3 20.9 180 215 4.62 3.87 2.15 2.20
DEWH
Buy
288
1.3
30.5 38.2
9.4
7.5
194 222 1.49 1.30 1.25 1.34
Housing Finance
46.6
22.1 18.6
4.44 3.92
RECL
Neutral
231
3.5
59.2 68.6
3.9
3.4
336 389 0.69 0.59 2.63 2.55
POWF
Neutral
120
4.8
24.0 25.5
5.0
4.7
149 167 0.81 0.72 2.37 2.12
Infra Finance
8.3
4.5
4.0
0.76 0.66
SHTF
Buy
1,157
4.0
68.4 84.6 16.9 13.7 503 570 2.30 2.03 1.96 2.01
MMFS
Buy
342
2.9
13.9 18.1 24.6 18.9 118 131 2.90 2.61 1.92 2.19
BAF
Buy
1,104
1.8
34.6 44.2 31.9 25.0 166 204 6.64 5.41 3.48 3.38
MUTH
Buy
337
2.0
28.0 33.6 12.0 10.0 159 180 2.12 1.87 3.66 3.57
SKSM
Buy
775
1.5
48.8 52.5 15.9 14.8 157 210 4.93 3.69 6.30 4.48
Asset Finance
12.2
13.6 11.1
2.20 2.00
NBFC Aggregate
67.0
13.8 11.8
2.49 2.20
Financials
259.6
17.5 13.9
1.84 1.67
*Multiples adj. for value of key ventures/Investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries
19.5
20.5
25.6
32.4
18.3
16.7
18.9
16.8
14.4
12.3
22.8
18.7
36.7
19.0
21.4
28.2
33.5
20.1
18.4
18.9
16.2
15.6
14.5
23.9
19.9
28.6
September 2016
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Financials | SFB Panel Discussion
12 Annual Global Investor Conference
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NOTES
September 2016
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Financials | SFB Panel Discussion
12 Annual Global Investor Conference
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SECTOR GALLERY
September 2016
7

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September 2016
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