Banking license, IPO and raising money
To get the “principle licenseâ€, your company will have to comply with the RBI’s
SFB guidelines by April 6, 2017. At what stage of compliance are you in terms of
meeting the RBI guidelines? How would the structure of the bank look?
The foreign holding of the company is currently at 92.48% vs the RBI requirement
of 49% for an SFB license. Will the company be able to reduce its FII shareholding
to 49% through this IPO and OFS?
What’s the rationale for applying for a small finance bank license? Why do you
think that SFB is superior to an NBFC microfinance company? Can you support
your arguments with numbers becaintuitively your RoE should remain
depressed for many years becaof regulatory requirements associated with
becoming a bank?
Can you please show your RoE progression over the next five years?
Are you raising capital to comply with the FII holding requirement to be eligible
for SFB and/or to fund your future growth?
Given that the current balance sheet leverage is only 3.3x, why you are raising
additional capital to the tune of `9bn which is 77% of your current net worth?
What kind of growth are you targeting to sweat this equity? Our calculations
suggest that the company will need to grow at 50% CAGR in 3 years to fully
utilise the capital raised.
Growth potential/Asside strategy
How many of your current branches can be converted into bank branches?
What’s your overall branch expansion strategy once you become a bank?
What kind of growth are you expecting over the next three years and are your
systems and processes equipped to handle a high pace of growth? Which
segments would drive your growth going forward?
In the DRHP, you have mentioned that the company plans to enter into gold
loans, two-wheeler loans and agriculture loans. Can you throw more light on
how these products fit into your overall operational model, as not many NBFCs/
small banks have been successful by spreading themselves too thin?
Should you not have focused on developing your existing businesses before
starting new product lines?
How much of your current loan book qualify for PSL? How will the compliance of
PSL guidelines impact the company’s profitability?
Liability franchise
Currently ~55% of the total borrowings are in the form of bank borrowings. As a
bank, you won’t be able to borrow from banks more than 2x of your net worth.
How are you going to reduce your dependence on bank borrowings and still
manage your loan growth?
The cost of funds for your microfinance subsidiary, EMFL, has increased from
11.2% in FY12 to 12.7% in FY15. This is counter intuitive, as the cost of funds for
MFIs have decreased during this period. E.g. SKS Microfinance (SKS) has reduced
the cost of its funds by 150bps in the last four years.
Do you think that your current borrowers can provide the deposit base? What
percentage your total liabilities can come from time deposits and CASA over the
next 3 years? How much of your funding costs can come down once you become
a bank?
Asquality
You have highest yield in microfinance but lowest NPAs amongst your products?
It looks counter intuitive?
Looking at the history of microfinance in India and across the world, do you think
that the current credit cost of 0.5% is sustainable in the microfinance business?
How would your NPAs look like if you move to 90-day NPA recognition in your
vehicle financing business vs the current 150-day recognition?
In your DRHP, you have mentioned that a majority of ‘micro housing’ loans are
offered to higher income MFI customers. How do you ensure that you are not
over leveraging your customers?
High exposure to stressed states: Tamil Nadu/Maharashtra/MP: The company
is highly exposed to Tamil Nadu with around 65%-70% of the company’s loan book
exposed to this state. (Refer Exhibit 2)
What has been the impact of the recent floods in Tamil Nadu on your growth and
asquality?
What is the company’s plan to diversify into other regions and what
geographical mix is the company targeting going forward?
Why do you think that a mass default similar to the 2010 default in the state of
Andhra Pradesh cannot occur in Tamil Nadu?
Maharashtra (15% of loan book) and Madhya Pradesh (7% of AUM) are two
states where most NBFCs are facing the maximum asquality pressure due to
multiple crop failures. How is your asquality behaving in these two states as
your numbers are not showing the stress, which other NBFCs, with high exposure
to these states, are showing?
Mid-term loans to MFI customers: As per your DRHP, a customer is only eligible
for a subsequent cycle of the loan if their track record of repayment is good and
meets with certain other requirements relating to their conduct within the group. But
in the DRHP, you have also stated that the company also extends mid-term loans to
certain eligible microfinance customers based on their requirements.
What is the rationale for extending mid-term loans to existing borrows who are
already borrowers?
How does the company ensure that these additional loans given to customers are
not meant to repay the original term loan?
Are such top-up loans given at higher interest rates? If not, then how does the
company manage taking such additional risk?
Others
Corporate social responsibilities (CSR): In the past you have contributed in the
range of 3.2% to 5.3% of PAT under CSR to Equitas Development Initiatives Trust
(EDIT) vs the requirement of 2% under the Companies Act. What’s the rationale
behind contributing a higher-than-required amount? Is it voluntary as the EDIT
website mentions that the “group is committed to contribute 5% of its annual profits
to this Trust� Would you continue to contribute such a higher share of profits to the
Trust going forward? Who are the trustees of EDIT and how does EDIT spend the
amount contributed by Equitas?
In your DRHP, it is stated that one criminal case is pending in the case of one of
the directors (Mr. N. Rangachary) of the company, which pertains to the
Negotiable Instruments Act, 1881. Can you give us more color on this?
As per your DRHP, three subsidiaries (EMFL, EFL and EHFL) are under litigation
proceedings regarding delays in payment or non-payment of dues to the
Employee Provident Fund. In addition to that EMFL was also under litigation for
paying wages at below minimum limits. Can you throw some light on this issue?
Keyman Insurance: In your DRHP, you have mentioned that KMI has been
taken for Mr. P. N. Vasudevan, Managing Director of the company. Up to what
extent is the company dependent on him to implement its future strategy?
What is the incentive structure for your employees? In your existing ESOP
schemes, 10.76mn options are outstanding. Is your company planning to issue
more ESOP schemes in future? What could this amount be and what could be the
potential dilution?
Your FY15 Annual Report states that during the year, EMFL did not have any
foreign currency earnings. However, foreign currency expenditure of `11.32mn
was incurred by the company. What exactly is this expenditure? Can you give us
more color on this as all of your business operations are domestic?
Zerodha (Trading Account)
RHP
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