Capital Small Finance Bank Limited has Filed DRHP for an IPO with SEBI on 01.11.2022

Capital Small Finance Bank Limited has filed DRHP with market regulator SEBI on 1st November, 2021.

The IPO consists of both Fresh Issue and Offer for Sale (OFS). The worth of Fresh Issue is Rs. 450 crore while an OFS of up to 3,840,087 equity shares.

Business Model of Company

The Company commenced operations as India’s first small finance bank in 2016, and is among the leading SFBs in India in terms of asset quality, cost of funds, and retail deposits for Fiscal 2021. The Company has the most diversified portfolio with sizable book in multiple asset classes as compared to other SFBs with a highest proportion of secured lending of 99% as of Fiscal 2021 among the SFBs. The Company has the best asset quality among the SFBs represented by lowest GNPA and NNPA of 2.08% and 1.13% respectively as of Fiscal 2021.

The Company offers a range of banking products on the asset and liability side. The asset products primarily include agriculture loans, MSME and trading loans (working capital, machinery loans etc.) and mortgages (housing loans). As of June 30, 2021, total loan book was 36,808.49 million which comprised primarily of agriculture loans constituting 36.88%, MSME and trading loans constituting 26.08% and mortgage loans constituting 22.66% of loan book which accounted for 85.62% of the total loan book as of June 30, 2021. As on June 30, 2021 and March 31, 2021, 99.44% and 99.39% of the loan book was secured with 86.02% and 86.24% of the loans secured by immovable properties. Further, the Company has strategically focused on building a granular loan book.

Who is the Management of the Company?

As on the date of this Draft Red Herring Prospectus, the following is the management of the company:

(i) Madan Gopal Sharma is the Part-time Chairman and Independent Director of the Bank. He holds a bachelors’ degree in science from Panjab University. He is also a qualified chartered accountant and company secretary, and is a member of the Institute of Chartered Accountants of India and the Institute of Company Secretaries of India. Further, he has completed postgraduate diploma in business and industrial management from Datamatics institute of Management. He has over four decades of experience in, among others, finance, taxation, corporate laws, commercial functions and project appraisals.

(i) Sarvjit Singh Samra is the Managing Director and Chief Executive Officer of the Bank. He holds a bachelor’s degree in arts
and a master’s degree in business administration from Guru Nanak Dev University. He has over 35 years of experience in the banking and financial industry spread over various roles, including senior positions. He has been associated with the Bank since its inception and has been instrumental in the conversion of the Bank from a local area bank to an SFB. He has previously served as the managing director of various asset financing companies.

Why is the company raising funds via IPO?

Each of the Selling Shareholders will be entitled to their respective portion of the proceeds from the Offer for Sale in proportion of the Equity Shares offered by the respective Selling Shareholders as part of the Offer for Sale. The Bank will not receive any proceeds from the Offer for Sale.

The Bank proposes to utilize the Net Proceeds from the Fresh Issue towards augmenting the Bank’s Tier – I capital base to meet the Bank’s future capital requirements. Further, the proceeds from the Fresh Issue will also be used towards meeting the expenses in relation to the Offer. The Bank also expects to receive the benefits of listing the Equity Shares on the Stock Exchanges.

Is there any OFS in the IPO?
The IPO of Capital Small Finance Bank Limited consists of both Fresh Issue and Offer for Sale (OFS). The worth of Fresh Issue is Rs. 450 crore while an OFS of up to 3,840,087 equity shares.

Financials of the company?

As per the financial statements of the Company, in FY22, the total income of the Company has increased 14% to Rs. 632 crore as against Rs. 557 crore in the previous financial year. The total expenses of the Company have also increased 10% to Rs. 569 crore as against Rs. 516 crore in the previous financial year. The net profit of the Company increased 54% to Rs. 63 crore as against Rs. 41 crore in the previous financial year.
In FY22, the net assets of the Company increased 12% to Rs. 7153 crore as against Rs. 6371 crore in the previous financial year. The total equity and liabilities of the Company have also increased 12% to Rs. 7153 crore as against Rs. 6371 crore in the previous financial year.

In FY22, the net cash used in operating activities of the Company was Rs. 210 as against Rs. 174 cash generated from the previous financial year. The net cash used in investing activities of the Company was Rs. 13 crore as against Rs.12 crore in the previous financial year. The net cash used in financial activities of the Company was Rs. 119 crore as against Rs. 196 cash generated in the previous financial year. The cash and cash equivalents at the end of the year of the Company was Rs. 397 crore as against Rs. 741 crore in the previous financial year.

Risk in The IPO

Business of the Company is Concentrated in North India

The business of the Company is concentrated in North India, particularly in the state of Punjab, and any adverse change in the economy of North India could have an adverse effect on the business of the Company, financial condition, results of operations and cash flows. A significant number of the Company’s Branches are located in Punjab. Due to this concentration, the success and profitability of overall operations may be exposed to regional factors.

The Company is Subject to Strict Regulatory Requirements and Prudential Norms

The Company is regulated under the Banking Regulation Act and has to comply with circulars and directives issued by the RBI that apply to small finance banks. The Banking Regulation Act limits the flexibility of shareholders and management of a small finance bank in many ways, including by way of specifying certain matters for which a banking company would require RBI approval. If the Company is unable to comply with such laws, regulations and norms it may have an adverse effect on the business of the Company, financial condition, results of operations and cash flows.

The Company is Exposed to Operational and Credit Risks

The Company is exposed to operational and credit risks which may result in NPAs. If the Company is unable to control the level of NPAs in the portfolio effectively or if the Company is unable to improve or maintain the provisioning coverage as a percentage of gross NPAs, the business of the Company, financial condition, results of operations and cash flows could be adversely affected.

Volatility in Interest Rates

The results of operations are substantially dependent upon the amount of the Net Interest Income. The Net Interest Income of the Company for the three months ended June 30, 2021 and June 30, 2020 and the Fiscals ended March 31, 2021, 2020 and 2019, was ₹ 570.49 million, ₹475.25 million, ₹ 1,986.11 million, ₹ 1,726.23 million and ₹ 1,351.40 million respectively which was 83.89%, 85.11%, 81.24%, 80.07% and 81.19% of the net total income of the Company. The Company may be impacted by volatility in interest rates, which could cause the Net Interest Margin to decline and adversely affect the results of operations and cash flows.

The Company is Involved in Legal Proceedings

There are outstanding legal proceedings involving the Bank. These proceedings are pending at different levels of adjudication before various courts, tribunals and appellate tribunals. The Company cannot assure that these proceedings will be decided in its favor. Any adverse developments related to which could adversely affect the reputation, business and cash flows of the Company.