RBI listing diktat: Should you avoid or buy small finance banks?

Equitas Holdings and Ujjivan Financial Services, the erstwhile microfinance lenders that got converted into small finance banks (SFB), had a rocky start to their innings post-demonetisation as bad loans soared. Just when they were emerging out of this mess, sentiment took a big knock with the Reserve Bank of India (RBI) refusing to waive-off key licensing norms warranting them to list their SFBs.

What spooked the market about these stocks?

The central bank has asked Equitas and Ujjivan to comply with its small bank licence norms, which require them to list banking subsidiaries within three years and maintain minimum promoter shareholding in the bank (at least 40 percent) for a period of five years from the date of commencement of their business.

As a result, Equitas’ SFB has to be listed by September 4, 2019 and 40 percent promoter shareholding will have to be maintained till September 4, 2021. Ujjivan will have to list its SFB by January 31, 2020 and maintain promoter shareholding until January 31, 2022.

While this restriction is indeed disappointing for shareholders of the holding company, which has no business of its own, both entities are working at ways to protect the interest of investors. This could be partially mitigated by distributing up to 60 percent shares of the SFB to existing shareholders of the holding company.

In the past six months, Equitas and Ujjivan stocks have corrected close to 33 percent and 44 percent, respectively, at a time when the operating environment was improving.

Strong Q2 FY19 performance

In the quarter gone by, Equitas’ profits grew 4.6 times to Rs 49.7 crore, driven by a 22 percent growth in net interest income, strong surge in fees and well contained costs. For Ujjivan, the profit picture was encouraging too, with the company reporting an after-tax profit of Rs 44.3 crore as against a loss in the year-ago quarter on the back of healthy 41 percent growth in net interest income and a steep decline in provisions.

Robust business growth

The superlative performance was backed by strong business growth. For Equitas, assets under management grew 36 percent to Rs 9,980 crore, led by a 55 percent growth in non-micro finance portfolio that now stands at 73 percent. While the non-microfinance portfolio grew 2 percent YoY, sequential growth in this portfolio has picked up. In Q3, disbursements grew 56 percent to Rs 2,171 crore.

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