SBFC Finance
- SBFC Finance is coming out with a 100% book building; initial public offering (IPO) of 18,98,87,816 shares of Rs 10 each in a price band Rs 54-57 per equity share.
- Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
- The issue will open for subscription on August 3, 2023 and will close on August 7, 2023.
- The shares will be listed on BSE as well as NSE.
- The face value of the share is Rs 10 and is priced 5.40 times of its face value on the lower side and 5.70 times on the higher side.
- Book running lead managers to the issue are ICICI Securities, Axis Capital and Kotak Mahindra Capital Company.
- Compliance Officer for the issue is Jay Mistry.
Profile of the company
The company is a systemically important, non-deposit taking non-banking finance company (NBFC-ND-SI) offering Secured MSME Loans and Loans against Gold, with a majority of its borrowers being entrepreneurs, small business owners, self-employed individuals, salaried and working class individuals. Among MSME-focused NBFCs in India, the company has one of the highest assets under management (AUM) growth, at a CAGR of 44% in the period from Fiscal 2019 to Fiscal 2023. It has also witnessed healthy disbursement growth, at a CAGR of 40% between Fiscal 2021 and Fiscal 2023.
The company has a diversified pan-India presence, with an extensive network in its target customer segment. As of March 31, 2023, it has an expansive footprint in 120 cities, spanning 16 Indian states and two union territories, with 152 branches. Its geographically diverse distribution network, spread across the North, South, East and West zones, allows it to penetrate under banked populations in tier II and tier III cities in India. Among MSME focused NBFCs, it had the lowest proportion of AUM emanating from the largest state in its portfolio as of March 31, 2023, being 17.42%, demonstrating better diversification. As a result of its active management of state concentration, it has been able to maintain low levels of AUM concentration per state despite its growth over the years. Its AUM is diversified across India, with 30.84%, being Rs 15,242.41 million, in the North (in the states of Chandigarh, Delhi, Haryana, Punjab, Rajasthan, Uttar Pradesh and Uttarakhand), 38.53%, being Rs 19,047.97 million, in the South (in the states of Karnataka, Andhra Pradesh, Telangana, Tamil Nadu and Puducherry), and 30.63%, being Rs 15,137.85 million, in the West and East (in the states of Gujarat, Madhya Pradesh, Maharashtra, West Bengal, Assam and Bihar) collectively, as of March 31, 2023. Its disbursements across zones are also well-distributed, and it has reduced its concentration risk across industries and sectors, as demonstrated by the fact that no single industry, including the manufacturing sector, contributes more than 10% of its loan portfolio as of March 31, 2023.
The company’s complete portfolio of loans has in-house origination and benefits from its risk management framework. Leveraging its significant operational experience, it has set up stringent credit quality checks and customized operating procedures that exist at each stage for comprehensive risk management. It primarily focus on small enterprise borrowers, whose monthly income is up to Rs 0.15 million, with a demonstrable track record of servicing loans such as gold loans, loans for two-wheeler vehicles and have a CIBIL score above 700 at the time of origination. It sources customers directly through its sales team of 1,911 employees as of March 31, 2023, and have adopted a direct sourcing model through branch-led local marketing efforts, repeat customers or through walk-ins, which has helped it maintain contact with its customers and establish strong relationships with them, high levels of customer satisfaction and increased loyalty. Its risk management and underwriting processes, including its extensive customer assessment methods and monitoring systems, have aided its healthy portfolio quality indicators such as low rates of Gross NPAs and Net NPAs.
Proceed is being used for:
- Augmenting the company's capital base to meet future capital requirements arising out of the growth of the business and assets.
- Receiving the benefits of listing of the Equity Shares on the Stock Exchanges.
- Enhancement of the company’s brand name and creation of a public market for Equity Shares in India.
Industry overview
The NBFC sector has, over the years, evolved considerably in terms of size, operations, technological sophistication and entry into newer areas of financial services and products. The number of NBFCs as well as the size of the sector have grown significantly, with a number of players with heterogeneous business models starting operations. Over the last few years, CRISIL MI&A has seen a transformation in the Indian financial services landscape. The increasing penetration of neo-banking, digital authentication and mobile phone usage as well as mobile internet has resulted in the modularization of financial services, particularly credit. The sector has also seen the emergence of several financial technology entities (“fintechs”) that leverage technology, data, and business insights to provide various financial products and services to identified customer segments. Fintech players in India started lending in Fiscal 2015 but they started gaining traction from Fiscal 2017 onwards. The business model of fintech firms differ widely but in almost all cases they use technology to change or support existing way of doing business, and hold the promise of enhancing customer convenience, facilitating access to credit for unserved or underserved customer segments and/or improving operating efficiency.
Many times, fintechs enter into tie-ups with financing partners (banks and NBFCs) for taking the loans originated by them on the balance sheet of the partner. Reflecting the growing importance of NBFCs in the financial services landscape and their ability to offer differentiated solutions to meet the requirement of target customers, the market share of NBFCs in overall systemic credit has increased from approximately 16% in Fiscal 2017 to approximately 18% in Fiscal 2023. After a moderation in growth post COVID, NBFCs are back on track with an estimated credit growth of 12% -13% during Fiscal 2023. Going ahead, CRISIL MI&A expects the growth trend to continue, with credit growth at 13% - 14% during Fiscal 2024. The industry will continue to witness the emergence of newer NBFCs catering to specific customer segments. The pandemic and consequent acceleration in adoption of technology and change in consumer habits and increasing availability of data for credit decision-making has made it possible to build an NBFC lending business without investing large sums to have brick-and-mortar presence on the ground. Overall, between Fiscal 2023 to Fiscal 2025, CRISIL MI&A forecasts NBFC credit to grow at a CAGR of 12% - 14%. Further, retail credit given out by NBFCs is forecast to grow at a pace of 13% -15% CAGR over the same period.
Pros and strengths
Diversified pan-India presence with extensive network to cater to target customer segment: The company has strategically focused its expansion within its target customer segment which offers significant growth opportunities. It is a lender that provides loans to borrowers being entrepreneurs, small business owners, self-employed individuals, salaried and working class individuals. Most small businesses in India do not maintain documents such as income proof, business registration, GST registration, income tax filings, and bank statements, which makes access to credit challenging. Its understanding of local characteristics of these markets and customers has allowed it to address the needs of low and middle income customers and assisted it to penetrate deeper into such markets. As of March 31, 2023, it has an expansive footprint in 120 cities, spanning 16 Indian states and two union territories, with 152 branches. The extent of its network allows it to service its existing customers and attract new customers as a result of personal relationships cultivated through proximity and frequent interaction by its employees. This allows it to expand its presence across the country more seamlessly than regional players.
100% in-house sourcing, leading to favourable business outcomes: Prohibitive cost of delivering services physically and high risk perception has constrained traditional institutions’ ability to provide credit to underserved or un-served MSMEs and self-employed individuals historically. It acknowledges the complexities of underwriting such loans, and to ensure positive business outcomes, 100% of its loan portfolio has in-house origination, limiting its reliance on direct selling agents or connectors in order to ensure a more direct, thorough understanding of the customer’s profile. The company source customers directly through its sales team of 1,911 personnel as of March 31, 2023, and has adopted a direct sourcing model through branch-led local marketing efforts, repeat customers or through walk-ins, which has helped it maintain contact with its customers and establish close relationships with them, high levels of customer satisfaction and increased loyalty. Its AUM per employee has also increased from Rs 15.10 million as of March 31, 2021, to Rs 15.59 million as of March 31, 2022 and further to Rs 17.52 million as of March 31, 2023.
Comprehensive credit assessment, underwriting and risk management framework: The company has a credit assessment and risk management framework to identify, monitor and manage risks inherent in its operations. Credit management is crucial to its business since a significant number of its customers are from the underserved financial segment. It has a core focus area of small enterprise borrowers, whose monthly income is up to Rs 0.15 million, with a demonstrable track record of servicing loans such as gold loans, loans for two-wheeler vehicles, among others. High risk perception and prohibitive cost of delivering services physically have constrained formal lending to MSMEs. It focuses on customers who have better income profiles, providing it with a stable growth trajectory. Accordingly, as a lender, its lending decisions are contingent on its evaluation of the ability of the individual and the business to service the loan, and the basis for such assessment is a combination of credit history and present cash flows. The company’s risk management committee has developed risk management policies, addressing credit risk, market risk, liquidity risks and operational risks. Leveraging its significant operational experience, it has set up stringent credit quality checks and customised operating procedures that exist at each stage for comprehensive risk management.
Extensive on-ground collections infrastructure leading to maintenance of asset quality: While the company’s underwriting model contributes to suitable customers being onboarded, it has also created an extensive on-ground collections infrastructure to ensure that it maintain a high asset quality. Its branches are staffed with persons sourced from the local area, with each branch servicing an area with a limited radius, resulting in branch staff being able to quickly attend a customer’s location as issues arise. It also has an in-house collections team, responsible for detecting likely default early, thereby maintaining relatively low Gross NPA ratios. It has a three-tier collections infrastructure, comprising (i) tele-calling, (ii) field collection, and (iii) legal recovery, in order to optimize collections and minimize NPAs. It also tracks collections in real time through its mobile application. Its collection structure is comparable to larger NBFCs and banks, where there is an experienced regional supervisor reporting into an independent collection vertical dedicated to ensuring collection efficiencies. Additionally, it deploys collection agencies to assist its in-house collections team, and as of March 31, 2023, it has engaged 19 such agencies which are dedicated to its Secured MSME Loan portfolio.
Risks and concerns
Face difficulties and incur additional expenses in operating in semi-urban and rural markets: The company primarily serves low and middle income small business customers, salaried or working class individuals and self-employed customers in urban and semi-urban areas in India, comprising Tier – 2 and Tier – 3 cities, and are increasingly serving those in rural areas where there is scope for faster growth in bank credit activity as financial awareness increases. In semi-urban and rural locations, infrastructure may be limited, particularly for transportation, electricity and internet bandwidth. At some of its branch offices in remote markets, it may face difficulties in conducting operations, such as accessing power facilities, transporting people and equipment, and implementing technology measures. It may also face increased costs in conducting its business and operations and implementing security measures. The company cannot assure that such costs will not increase in the future as it expands its branch network further into semi-urban markets and also into rural markets, which could adversely affect its profitability.
Handle high volumes of cash and gold jewellery in a dispersed network of branches: The company’s business involves carrying out cash and gold jewellery transactions that expose it to the risk of fraud by employees, agents, customers or third parties, theft and burglary. Operational risks can result from a variety of factors, including failure to obtain proper internal authorisations, improperly documented transactions, failure to adequately deal with the risks associated with significant cash collections, failure of operational and information security procedures, computer systems, software or equipment, fraud, inadequate training and employee errors. These have been in the nature of misappropriation and criminal breach of trust by the branch staff, which has not had any material adverse impact on its business and operations. While it may endeavour to increase its non-cash collections, it cannot guarantee that it will be successful in its efforts to move towards digital collections. Also, while it retains insurance to mitigate cash and gold related risks including office protection and fidelity policies, it cannot assure that the insurance obtained by it adequately covers all risks involved or will be paid in relation to the entire amount involved, or at all.
Rely significantly on information technology systems: The company may be subject to disruptions, failures or infiltrations of its information technology systems arising from events that are wholly or partially beyond its control (including damage or incapacitation by human error, natural disasters, electrical or telecommunication outages, sabotage, computer viruses, cyberattacks or similar events, or loss of support services from third-parties, such as internet backbone providers). Although it has not experienced any significant disruptions to its information technology systems in the past, it cannot assure that it will not encounter disruptions in the future. Data security breaches could lead to the loss of intellectual property, public exposure of personal information of its customers and employees, which could result in breaches of applicable data security laws and resultant imposition of monetary penalties. Although it has not experienced any data security breaches in the past, any such security breaches or compromise of technology systems could result in institution of legal proceedings and potential imposition of penalties, which may have an adverse effect on its business, results of operations and reputation.
Fluctuations in the market values of company’s investments: As part of the company’s treasury management, it has formulated a board-approved investment policy in accordance with the RBI Master Directions. Its investment policy prescribes policies for investments in SEBI registered mutual funds, Government Securities/ treasury bills, liquid/ liquid plus mutual funds and fixed deposits with banks and small finance banks, subject to the overall investment limit fixed by the Board. The value of these investments depends on several factors beyond its control, including the domestic and international economic and political scenario, inflationary expectations, interest rate volatility and monetary policies. For instance, on June 23, 2023, the investment committee of the company has decided to exit 7.26% Government Securities maturing in 2032, since this investment was perceived to have high risk of volatility due to its long maturity period. The company exited this investment and has invested in treasury bills to be held till maturity to maintain the required Liquidity Coverage Ratio.
Outlook
SBFC Finance is a systemically important, non-deposit-taking Non-Banking Finance Company (NBFC-ND-SI). The primary customer base of the company includes entrepreneurs, small business owners, self-employed individuals, and salaried and working-class individuals. It provides its services in the form of Secured MSME Loans and Loans against Gold. SBFC Finance tends to extend its services to entrepreneurs and small business owners who are underserved or unserved by traditional financial institutions like banks. There are various factors taken into consideration while offering financial assistance in the form of loans. It offers its services so that entrepreneurs can fulfill their financial requirements and thrive. Technology is at the core of its operations and it has adopted a well-defined IT strategy since its inception. In terms of distribution, its centralized real-time lending system, is a multi-product digital platform supporting mobile customer on-boarding, paperless login and loan processing, which leads to quicker turn-around time. On the concern side, in making a decision whether to extend credit to prospective customers, it rely upon data received from its customers and third-party intermediaries to assess credit handling ability, debt servicing capacity, and overall risk level to determine lending exposure and loan pricing in accordance with its internal credit policy. If the company does not make accurate credit decisions, its business and financial results will be adversely affected, and the impact could be material.
The company is coming out with an IPO of 18,98,87,816 equity shares of face value of Rs 10 each. The issue has been offered in a price band of Rs 54-57 per equity share. The aggregate size of the offer is around Rs 1025.39 crore to Rs 1082.36 crore based on lower and upper price band respectively. On the financial front, the company’s total income increased by 39.51% from Rs 5,307.02 million in Fiscal 2022 to Rs 7,403.61 million in Fiscal 2023. Profit after tax (PAT) increased from Rs 645.21 million in Fiscal 2022 to Rs 1,497.36 million in Fiscal 2023. Meanwhile, the company plans to ensure that its information technology systems continue to help it with several functions, including loan origination, credit underwriting, collections and customer service. It intends to strategically invest its resources for leveraging technology for efficient operations as it scales up to ensure increased effectiveness of its operations. It intends to reduce its operating costs and increase efficiency in its business operations to improve the overall customer experience through increasing use of technology. It intends to continue strengthening and increasing the user-friendliness of its existing technology infrastructure.