Jana Small Finance Bank

Fourth largest SFB

A diversified loan book with strong growth, wide geographical reach and stable assets quality

Jana Small Finance Bank is the fourth largest Small Finance Bank in terms of AUM as well as in terms of deposit size end September 2023. The bank has 771 banking outlets, including 278 banking outlets in unbanked rural centers, in 22 states and two union territories. The bank has served nearly 12 million customers since 2008, including 4.87 million active customers end-September 2023. The bank has gained an understanding of the financial needs of the underbanked and underserved customers over the past 16 years.

The bank was incorporated on 24 July 2006, and registered as a non-banking finance company (NBFC) on 4 March 2008. It was awarded non-banking finance company-microfinance institution (NBFC-MFI) status on 5 September 2013. The bank started operating as a Small Finance Bank with effect from 28 March 2018 and became a Scheduled Commercial Bank on 16 July 2019.

The bank offers secured loan products like secured business loans, micro loans against property (Micro LAP), MSME loans, affordable housing loans, term loans to NBFC, loans against fixed deposits, two-wheeler loans and gold loans. The unsecured loan products are individual and micro business loans, agricultural and allied loans, and group loans (offered to a group of women as per the Joint Liability Group (JLG) model)

The advances of the bank have increased to Rs 18000.74 crore end March 2023, representing a CAGR of 23.31% over Rs 11838.98 crore end March 2021 and further increased to Rs 21347.130 crore end September 2023. The bank has focused on increasing secured gross advances to diversify advances, and within unsecured advances, the focus is on growing agricultural and allied loans. The secured advances have increased at a strong CAGR of 39.69% from FY2021 to FY2023 and further increased to 57.42% of loan book end September 2023 up from 42.87% end March 2021. Agricultural and allied loans as a percentage of gross advances increased from 13.10% end March 2021 to 16.93% end September 2023.

The bank has been able to leverage the strength of the `Jana’ brand to rapidly grow its deposit portfolio since the bank commenced operations as a Small Finance Bank in March 2018. Deposits have increased from Rs 12316.26 crore end March 2021 to Rs 16334.02 crore end March 2023, representing a CAGR of 15.16% and further increased to Rs 18936.72 crore end September 2023. The bank has placed a strong emphasis on increasing Retail Deposits. The access to a diversified Retail Deposit base has helped to decrease Cost of Funds from 8.61% for FY2021 to 7.55% for H1FY2024.

The bank also acts as a corporate agent for third-party life insurance products, general (non-life) insurance products and health insurance products. The bank also offers Point of Sales (POS) terminals and payment gateway services through merchant acquiring partners. In addition to delivering products and services through banking outlets and ATMs, the bank delivers products and services through business correspondents, ATM cum debit cards, mobile banking platforms, internet banking portals and SMS alerts. In line with vision, the bank has been upgrading technology platforms. A significant proportion of sourcing and collections across assets and liabilities are digitized using mobile phones and tablets, with an emphasis on straight through processing while incorporating fraud and regulatory checks.

The key shareholders of the bank include TPG, HarbourVest Group, Amansa Capital, Morgan Stanley and Hero Ventures.

Ajay Kanwal, MD and CEO of the bank, with more than 33 years’ experience in financial services and was previously, among other roles, the Regional CEO, ASEAN and South Asia at Standard Chartered Bank in India and Singapore before joining the bank in August 2017.

The bank has significantly reduced its GNPA ratio to 2.44% end September 2023 from 3.94% end March 2023 and 7.25% end March 2021. NNPA ratio has also declined to 0.87% end September 2023 from 2.64% end March 2023 and 5.33% end March 2021. Further, the bank has raised provision coverage ratio to 64.9% end September 2023 from 27.89% end March 2021.

The bank has maintained healthy net interest margins at 7.76% in H1FY2024 up from 7.45% in H1FY2023 and 7.73% in FY2023.The cost to income ratio of the bank stands at 58.48%. The RoA of the bank is strong at 1.61% and RoE at 19.6% in H1FY2024.

The capital adequacy ratio of the bank stands at 17.5% with Tier I ratio at 15.73% end September 2023.

The Offer and the Objects

The initial public offer (IPO) consists of fresh issue of Rs 462 crore through issuance of 1.18 crore equity shares at the lower band of Rs 393 per share (face value Rs 10 per share) and 1.12-crore shares at the upper band of Rs 414 per share. The issue also consists of offer-for-sale (OFS) of 0.26- crore equity shares to raise Rs 102.52-108.00 crore.

The promoter, Jana Holdings, is not participating in the OFS. The promoter shareholding would decline to 22.5% post IPO from 25.2% pre-IPO.

The issue is to be made through the book-building process and will open on 07 February 2024 and will close on 09 February 2024.

The bank proposes to utilize the net proceeds from the offer towards augmenting Bank’s Tier I capital base to meet future capital requirements. The listing of the bank is also in line with the terms of the RBI SFB licensing guidelines, requiring the bank to list its Equity Shares on the stock exchanges within three years from reaching network of Rs 500 crore.

Strengths

The bank has a pan-India presence with a wide distribution network of 771 banking outlets, including 278 banking outlets in unbanked rural centers, in 22 states and two union territories.

The bank has served nearly 1.2 million customers since 2008, including 48.7 lakh active customers end September 2023.

The bank has significantly digitized its operations and most of services are available in digital form to customers.

The average age of the employee base is around 30 years and staff has adapted to technology and is hands-on with the digital processes in sourcing, underwriting, collection, and other functions.

The bank has adopted an integrated risk management approach. Its integrated risk management framework lays down core principles in identifying, measuring, assessing, and managing the key risks.

The bank has more than 16 years’ experience in serving underbanked and underserved customers and most of its asset products are catered for such customers and the MSME segment.

The bank provides banking services at customers’ doorsteps in urban and rural geographies, thereby driving financial inclusion for the underbanked and underserved customer segment.

The bank has grown retail deposits base rapidly and diversified deposit franchise. The bank is among the top four Small Finance Banks in India in terms of deposit size end September 2023.

Access to a diversified Retail Deposit base has helped to decrease Cost of Funds from 8.61% end March 2021 to 7.55% end September 2023.

Weaknesses

The unsecured microfinance loans of the bank accounts for 42.3% of loan book end September 2023. Microfinance loans are provided to individuals without the security of collateral and are at a higher credit risk than secured loans.

Micro Loan borrowers generally have limited sources of income and credit histories through which the bank can accurately assess their credit worthiness.

The states of Tamil Nadu, Karnataka, and Maharashtra account for a significant portion of advances 38.24%, deposits 31.59% and branches 28.92%. Any adverse developments such as a slowdown in economic activity, political unrest, natural disasters, or epidemics in these states could adversely affect business.

The bank has high dependence on bulk deposits at 32.8%, while the CASA deposits ratio is relatively low at 20.5% end September 2023. A partial or complete withdrawal of bulk deposits by any of the customers could adversely affect business.

There is dispute regarding a pool of receivables amounting to Rs 100 crore assigned to Bank of Maharashtra (BoM) along with the associated interest payable. The High Court of Bombay has directed BoM and the bank to resolve the dispute amicably which is currently pending.

Valuations

EPS on post-issue equity for TTM ended September 2023 works out to Rs 39.5. At the price band of Rs 393 to Rs 414, P/E works out to 9.9-10.5x of EPS for TTM ended September 2023. The bank has conducted a pre-IPO placement of 24.39 lakh equity shares in January 2024 at an issue price of Rs 414 each aggregating to Rs 101 crore.

Post-issue, the book value (BV) will be Rs 302.24, while adjusted BV (ABV) net of net non-performing assets and 10% of restructured loans works out to Rs 282.2 per share at upper price band.

The scrip is being offered at a price to Adj BV multiple of 1.5x at the upper price band.

Among peers, AU SFB is trading at P/ Adj BV multiple of 4.4x, Ujjivan SFB 2.6x, Equitas SFB 2.3x, Utkarsh SFB 2.2x, ESAF SFB 1.7x and Suryoday SFB 1.1x.

In terms of PE, AU SFB is trading at 31.1x, Equitas SFB 15.9x, Utkarsh SFB 12.9x, Suryoday SFB 11.3x, Ujjivan SFB 9.3x and ESAF SFB 9.1x.

Jana SFB has posted strong loan growth of 35.0% end September 2023. Among peers, the loan growth of Equitas SFB was at 37.1%, ESAF SFB 37.0%, Suryoday SFB 28.7%, Ujjivan SFB 26.9%, Utkarsh SFB 26.4% and AU SFB 24.0%.

Jana SFB has low GNPA ratio at 2.4% end September 2023, while NNPA ratio was also healthy at 0.9%. Among peers, NNPA ratio of Ujjivan SFB was at 0.1%, Utkarsh SFB 0.2%, AU SFB 0.6%, Equitas SFB 1.0%, ESAF SFB 1.2% and Suryoday SFB 1.5%.

RoA of Jana SFB was relatively low at 1.5% for TTM ended September 2023 compared with Ujjivan SFB at 3.2%, Utkarsh SFB 2.3%, Equitas SFB 1.9%, ESAF SFB 1.8%, AU SFB 1.7% and Suryoday SFB 1.4%.

Jana SFB has also witnessed low RoE of 13.1% for TTM ended September 2023 as compared to Ujjivan SFB at 27.8%, ESAF SFB 17.2%, Utkarsh SFB 16.7%, AU SFB 13.7% and Equitas SFB 13.7%.