Financials | Sector Update
Sector Update | 16 September 2015
Financials
RBI grants licenses to new niche category of banks “Small finance banks”
A big leap towards financial inclusion | MFIs takes it all
List of successful applicants
Au Financiers Ltd.
Capital Local Area Bank
Ltd.
Disha Microfin Pvt. Ltd.
Equitas Holdings Pvt. Ltd.
ESAF Microfinance and
Investments Pvt. Ltd.
Janalakshmi Financial
Services Pvt. Ltd.
RGVN (North East)
Microfinance Ltd
Suryoday Micro Finance
Pvt. Ltd.
Ujjivan Financial Services
Pvt. Ltd.
Utkarsh Micro Finance Pvt.
Ltd.
The Reserve Bank of India (RBI) has granted “in-principle” approval for setting up
small finance banks to 10 entities of the 72 applicants. Of the 10 shortlisted
candidates, eight are micro finance institutions (MFIs), one commercial vehicle
financier and one local area bank.
These applicants have been selected post screening by three committees. The key
selection criteria were the ability to raise the minimum initial capital required and the
status of ownership and control by residents. Also, one of the important factors
proposed was reach into unbanked areas and underserved sections of the population.
The screening committees did a thorough scrutiny, which involved assessment of
financial soundness, proposed business plan, fit and proper status based on due
diligence reports received from the regulators, investigative agencies, banks, etc.
The objectives of setting up of small finance banks will be for furthering financial
inclusion by (i) provision of savings vehicles primarily to unserved and underserved
sections of the population, and (ii) supply of credit to small business units; small and
marginal farmers; micro and small industries; and other unorganized sector entities,
through high technology-low cost operations.
Key Surprise:
One of the key objectives of RBI for granting the small bank license was
reach into unbanked areas and underserved sections of the population. While keeping
that in mind, RBI has granted license to 8 MFIs however the largest MFI (After
Bandhan converted into bank) SKS has not been able to get license. In our view lack of
identifiable promoter could be the reason.
Interestingly, the successful applicants are very well spread across the country with
virtually no geographical overlap. With 3 license applicants are from north India (AU
Rajasthan, Capital local bank- Punjab and Utkarsh from UP) 2 from west India (Disha
micro finance- Gujarat and Suryoday, Maharashtra) One from east India RGVN, Assam
and 4 from south India Janalakshmi and Ujjivan, Karnataka; Equitas, Tamil Nadu and
ESAF, Kerala.
Among our coverage universe only DHFL has applied and it could not obtain- we don’t
see it impacting the company in any manner; as it is a well-established player in the
housing finance space. Some of the other key entities / individuals which failed to
obtain license are IIFL Holdings, Repco Micro finance, VAYA Finserv Private (Promoted
by Dr. Vikram Akula), Mr. Manish Khera - Former MD Fino, Mr. V.Balakrishnan-
Former Infosys CFO, Mr. Collin R Timms - Founder Gurdian Bank Kenya, Mr. K Cherian
Varghese - Former CMD Union Bank.
Going forward, the RBI intends to use the learning from this licensing round to
appropriately revise the guidelines and move towards issuing licenses more regularly,
that is, virtually “on tap” licensing.
In our view,
this is a giant leap towards financial inclusion; as these small banks will be
able to serve the under-served within the ambit of stable regulatory framework.
Moreover, in due course, these applicants would be considered for universal banking
license if they are successfully able to build a profitable business model and achieve
the desired objectives.
Sunesh Khanna
(Sunesh.Khanna@MotilalOswal.com); +91 22 3982 5521
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com) /
Harshvardhan Agrawal
(Harshvardhan.Agrawal@motilalOswal.com)
16 September 2015
to refer through disclosures made at the end of the Research Report.
1
Investors are advised
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

Financials | Sector Update
Exhibit 1: Locations of Small Finance Bank
Applicants are very well spread across the country with minimal geographical overlap
Source: MOSL
16 September 2015
2

Financials | Sector Update
Brief profile of Successful Small Bank Applicants
Au Financiers Ltd.
AU Financiers is Systemically Important non-deposit taking NBFC
headquartered in Jaipur, Rajasthan. The company is engaged
providing finance to Small Road Transport Operators (SRTO) and
Micro, Small and Medium Enterprises (MSME) in rural and semi-urban
areas. The company largely offers its products and services in the
semi urban and rural parts of the country. The company has over 250
branches spread over 10 states in India with an AUM of over INR6.6b
(of which 90% of the portfolio qualifies as PSL). AU Finance has also
floated its Housing Finance subsidiary company in name of “Au
HOUSING FINANCE LIMITED” which started its business from March,
2012. AU housing has AUM of INR8.4b with average ticket size of
INR0.8mas on FY15.
Source: MOSL, Company
Exhibit 2: Key Financials
Source: Company, MOSL
Disha Microfin Private Ltd.
Disha Microfin is a Gujarat based microfinance company with
operations in the states of Gujarat, Rajasthan, Madhya Pradesh and
Karnataka. The company has 71 branches in 39 districts of the
aforementioned states and has an AUM of ~INR2b.
Exhibit 3: Key Financials
Source: MOSL, Company
Source: MFIN, Company, MOSL
Equitas Holdings Private Ltd.
Equitas Holding Private Ltd is a NBFC that provides microfinance
loans via its subsidiary Equitas Microfinance Private Ltd. Equitas
Holdings also owns majority stake in Equitas Finance Private Ltd
which provides used commercial vehicle finance loans, SME loans
and mortgage loans. The company also operates a HFC that provides
housing loans to self-employed in the unorganized sector. CDC
Group Plc., a DFI owned by the UK Government, is an investor in
Equitas Holding. Equitas Microfinance Private Ltd is has 361
branches in 124 districts spread across seven states and UTs of India.
Source: MOSL, Company
Exhibit 4: Key Financials
Source: MFIN, Company, MOSL
ESAF Microfinance and Investments Private Ltd.
ESAF Microfinance is a NBFC-MFIs based in Kerala. ESAF is the 10th
largest MFI in India with loan portfolio of over INR10b. The company
has operates over 200 branches in 73 districts of 9 states of India.
ESAF has presence in states of Madhya Pradesh, Maharashtra, Bihar,
Tamil Nadu, Chhatisgarh, Jharkhand, West Bengal, Kerala and
Pondicherry.
Exhibit 5: Key Financials
Source: MOSL, Company
Source: MFIN, Company, MOSL
16 September 2015
3

Financials | Sector Update
Janalakshmi Financial Services Private Ltd.
Janalakshmi Financial Services commenced microfinance operations
in Apr-08 by taking over the portfolio of Janalakshmi Social Services
(JSS), a not-for-profit company promoted by Mr. Ramesh
Ramanathan. JSS commenced its microfinance operations in Jul-06
by absorbing the Sanghamithra Urban Programme which had been
operational in the Bangalore City Area since Oct 2000. It has more
than 27m active customers, 200+ branches across 15 states in India.
Major investors include The Rohatyn Group, Enam Securities, GAWA
Capital, Morgan Stanley PE Asia, Tata Capital, TPG amongst others.
Source: MOSL, Company
Exhibit 6: Key Financials
Source: MFIN, Company, MOSL
RGVN (North East) Microfinance Ltd.
RGVN (North East) Microfinance Limited, has its roots from
Rashtriya Gramin Vikas Nidhi-the Society which was promoted by
Mr. S.M. Palia, former Executive Director, IDBI, in the year 1990 with
initial corpus contribution from IDBI & IFCI and later from NABARD
and Dorabji Tata Trust with the mission of developing and nurturing
NGOs and Community Based Organizations in Northeast India, with
headquarters in Guwahati. RGVN has over 100 branch offices
servicing over 0.25 million customers.
Source: MOSL, Company
Exhibit 7: Key Financials
Source: MFIN, Company, MOSL
Suryoday Micro Finance Private Ltd.
Suryoday Micro Finance was incorporated in 2008 and received
NBFC license in 2009. It started micro finance operations by opening
up 10 branches in Maharashtra and Andhra Pradesh. As of Aug-15,
Suryoday Micro Finance was present in seven states, operating
through 164 branches and serving over 0.6 million customers. Major
investors include DWM, Aavishkaar Goodwell, IFC, Lok Capital, HDFC
Ltd and HDFC Life.
Exhibit 8: Key Financials
Source: MOSL, Company
Source: MFIN, Company, MOSL
Ujjivan Financial Services Private Ltd.
Ujjivan Financial Services was founded in 2005, as a MFI with an
objective of providing financial services to the urban poor. Mr. Samit
Ghosh, founder and MD, is a career banker with over 30 years
specializing in retail banking. Currently, Ujjivan is one of the largest
MFI in India with AUM of over INR30b. With a large network of over
400 branches across 21 states and 3 union territories. Major investor
list include Elevar Equity, Women's World Banking Capital Partners,
Lok Capital, IFC, CX Partners, NewQuest, CDC, FMO, Wolfensohn
Fund Management, L.P., Bajaj Holdings, Sequoia Capital amongst
others.
Source: MOSL, Company
Exhibit 9: Key Financials
Source: MFIN, Company, MOSL
16 September 2015
4

Financials | Sector Update
Utkarsh Micro Finance Private Ltd.
Utkarsh Mirco Finance was founded by Mr. Govind Singh in 2009.
Based on Varanasi, it provides access to credit to poor people in the
northern Indian states of Bihar, Madhya Pradesh and Uttar Pradesh.
It has over 120 branches and close to 0.3 million active borrowers.
Major investor list include Aavishkaar Goodwell, CDC, IFC, Lok
Capital and Norwegian Microfinance Initiative.
Exhibit 10: Key Financials
Source: MOSL, Company
Source: MFIN, Company, MOSL
Capital Local Area Bank Ltd
Capital Local Area Bank Limited, the largest Local Area Bank in India.
The Bank has been operating in the five districts of Jalandhar,
Kapurthala, Hoshiarpur Ludhiana and Amritsar in Punjab. The bank
has loan book of ~INR9.3b and operates out of 39 branches with more
than 0.3m accounts.
Exhibit 11: Key Financials
Source: MOSL, Company
Source: MFIN, Company, MOSL
16 September 2015
5

Financials | Sector Update
Guidelines for Licensing of Small Banks
(From the final RBI guidelines published in November 2014)
Objective:
Increasing financial inclusion by (a) provision of savings vehicles to
under-served and un-served sections of the population, and (b) supply of credit
to small business units, small farmers, micro and small industries, and other
unorganized sector entities through high technology-low cost operations.
Key eligibility criteria for promoters:
(a) Resident individuals/professionals with
10 years of experience in Banking and Finance, companies, and societies, (b)
Existing NBFCs, MFIs, and LABs can also opt for conversion. Local focus and the
ability to serve smaller customers will be a key criterion in licensing such banks.
Who are not eligible?
Joint ventures by different promoter groups for the
purpose of setting up small finance banks would not be permitted. Proposals
from large public sector entities and industrial and business houses, including
from NBFCs promoted by them, will also not be entertained.
Branch expansion:
For the initial five years, prior RBI approval would be
required. At least 25% of branches would be required to be opened in unbanked
rural centers (population of up to 9,999)
Scope of activities
Small finance bank will primarily undertake basic banking activities of
acceptance of deposits and lending to underserved sections of society.
It can undertake non-risk sharing financial services activities such as
distribution of MF, Insurance and MF products.
The small finance bank can also become a Category II Authorized Dealer in
foreign exchange business for its clients’ requirements.
There will not be any restriction in the area of operations of small finance
banks; however, preference will be given to those applicants who in the
initial phase set up the bank in a cluster of under-banked States / districts,
such as in the North-East, East and Central regions of the country
The other financial and non-financial services activities of the promoters, if
any, should be kept distinctly ring-fenced and not comingled with the
banking business.
Capital requirements
Minimum paid-up equity capital of INR 1b
Minimum CAR – 15%; Tier 1 – 7.5% as per Basel-I computations
Promoter shareholding
Minimum initial shareholding of 40% with lock-in of 5 years
If shareholding above 40%, it should be brought down to 40% within 5
years, to 30% within 10 years and to 26% within 12 years
Mandatory listing once the networth reaches INR5b
16 September 2015
6

Financials | Sector Update
If the existing NBFCs / MFIs / LABs have diluted the promoters’ shareholding
to below 40%, but above 26%, due to regulatory requirements or otherwise,
RBI may not insist on the promoters’ minimum initial contribution.
Prudential norms
Robust risk management framework is required.
Would be subject to all prudential norms and RBI regulations that apply to
existing commercial banks, including maintenance of CRR and SLR. No
forbearance would be provided for complying with the statutory provisions.
Small Banks will have to meet PSL targets, including sub-targets.
Minimum 75% of loans should be towards priority sectors
The maximum loan size and investment limit exposure to single/group
borrowers/issuers would be restricted to 10%/15% of capital funds.
Loans and advances of up to INR2.5m, primarily to micro enterprises, should
constitute at least 50% of the loan portfolio.
Other conditions
Foreign shareholding as per prevailing FDI regulations for private banks
The small finance bank will be required to use the words “Small Finance
Bank” in its name in order to differentiate it from other banks.
If a promoter setting up a SFB and desires to set up a PB, it should set up
both types of banks under a Non-Operative Financial Holding Company
(NOFHC) structure.
Additional conditions for NBFCs/MFIs/LABs converting into a bank
Minimum networth – INR1b
NBFC / MFI will cease to exist; all business which a bank cannot statutorily
undertake needs to be divested / disposed of.
In case of existing NBFCs / MFIs / LABs converting into SFB, where there is
shareholding in excess of 10% by entities other than the promoters, RBI may
consider providing time upto 3 years for bringing it down to 10%.
16 September 2015
7

Financials | Sector Update
Exhibit 12: 9 of top 30 MFIs are now banking entities (8 are given SFB license and one (Bandhan) turned into a universal bank)
GLP Clients
States Districts
(INR m) ('000s)
Bandhan
SKS
Janalakshmi
Ujjivan
Equitas
Satin
Muthoot
GFSPL
Spandana
ESAF
Gramavidiyal
L & T Finance
Utkarsh
Share
Sontata
Suryoday
FFSL
SVCL
Annapurna
Arohan
Madura
Asirvad
BSS
Asmitha
Fusion
RGVN
Belstar
Disha
BSFL
Smile
95,296.0
41,712.0
37,736.0
32,741.0
21,440.0
21,407.0
15,047.0
14,471.0
11,726.0
10,161.0
10,145.0
9,087.0
7,281.0
6,433.0
5,951.0
5,810.0
4,255.0
4,229.0
3,981.0
3,839.0
3,696.0
3,424.0
3,273.0
3,128.0
2,948.0
2,290.0
2,038.0
2,007.0
1,957.0
1,337.0
6,530
3,650
2,340
2,200
2,300
1,190
980
850
1,100
570
870
850
610
710
410
490
270
330
340
320
320
280
180
330
220
230
180
180
280
220
22
19
17
24
7
11
9
5
11
9
4
8
8
17
6
7
6
7
6
4
3
5
2
12
5
5
5
6
15
2
246
292
151
194
124
121
93
64
186
73
50
87
65
207
64
38
32
70
63
38
38
44
18
131
32
31
12
45
111
23
Branches
2022
1135
233
423
361
267
302
238
763
224
270
276
240
756
209
145
211
123
116
104
221
141
69
414
62
104
68
99
126
101
Employees
Loan/
Client
(INR)
Amt Disbursed GLP/Emp
/Loan (INR)
(INR m)
21,886.0
12,259.0
20,682.0
19,918.0
14,116.0
22,418.0
19,189.0
6,660.0
17,501.0
13,884.0
11,029.0
14,089.0
16,972.0
15,848.0
20,065.0
17,588.0
22,868.0
18,028.0
16,670.0
16,824.0
14,660.0
11,876.0
16,716.0
15,680.0
20,111.0
15,980.0
15,796.0
20,605.0
16,761.0
12,399.0
7.2
4.8
6.0
4.6
5.5
8.6
5.1
5.4
3.5
4.6
4.2
5.5
4.2
1.9
4.5
4.3
6.3
4.4
4.5
4.4
3.3
6.2
6.6
1.9
5.0
4.1
4.2
4.5
1.8
2.0
GLP/
Clients/
branch
Branch
(INR m)
47.0
37.0
162.0
77.0
59.0
80.0
50.0
61.0
15.0
45.0
38.0
33.0
30.0
9.0
28.0
40.0
20.0
34.0
34.0
37.0
17.0
24.0
47.0
8.0
48.0
22.0
30.0
20.0
16.0
13.0
3,229
3,214
10,061
5,192
6,357
4,467
3,255
3,589
1,447
2,531
3,207
3,080
2,535
941
1,947
3,359
1,293
2,713
2,893
3,100
1,437
1,969
2,630
789
3,561
2,179
2,615
1,804
2,220
2,223
13,231 14,598.0
8,724 11,434.0
6,257 16,098.0
7,089 14,908.0
3,925
9,342.0
2,496 17,950.0
2,971 15,308.0
2,658 16,941.0
3,322 10,618.0
2,190 17,924.0
2,400 11,718.0
1,658 10,691.0
1,752 11,970.0
3,334
9,046.0
1,325 14,626.0
1,353 11,929.0
673 15,597.0
961 12,671.0
895 11,865.0
873 11,906.0
1,131 11,637.0
553 12,333.0
495 18,041.0
1,614
9,578.0
594 13,354.0
560 10,106.0
491 11,462.0
449 11,238.0
1,070
680
6,999.0
5,957.0
Source: MFIN, MOSL
16 September 2015
8

Financials | Sector Update
Exhibit 13: Valuation metrics
63.7
Rating
ICICIBC*
HDFCB
AXSB
KMB*
YES
IIB
DCBB
FB
JKBK
SIB
Private Aggregate
SBIN (cons)*
PNB
BOI
BOB
CBK
UNBK
OBC
INBK
CRPBK
ANDB
IDBI
DBNK
Public Aggregate
HDFC*
LICHF
DEWH
IHFL
GRHF
REPCO
IDFC
RECL
POWF
SHTF
MMFS
BAF
NBFC Aggregate
Buy
Buy
Buy
Neutral
Buy
Buy
Buy
Buy
Neutral
Buy
Buy
Buy
Neutral
Buy
Buy
Buy
Buy
Buy
Neutral
Buy
Neutral
Neutral
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Buy
Buy
CMP
Mcap
EPS (INR)
FY17
25.7
59.2
43.6
27.4
76.4
52.1
9.4
7.1
17.3
3.1
31.6
26.8
39.4
24.6
66.0
46.2
63.2
31.7
21.9
22.8
19.7
13.6
44
43
33
75
9
33
12
76
62
81
18
267
P/E (x)
BV (INR)
P/BV (x)
FY16
1.59
3.59
2.26
3.48
2.31
3.13
2.04
1.22
0.67
0.71
2.62
0.98
0.62
0.34
1.00
0.46
0.54
0.27
0.45
0.34
0.35
0.36
0.30
0.67
4.51
2.42
1.24
3.51
9.84
4.22
0.94
0.84
0.80
1.90
2.12
3.87
2.57
FY17
1.33
3.10
1.94
3.04
1.95
2.71
1.77
1.10
0.61
0.66
2.29
0.88
0.56
0.31
0.91
0.42
0.48
0.25
0.41
0.30
0.32
0.33
0.28
0.61
3.50
2.04
1.08
3.05
7.95
3.54
0.86
0.70
0.69
1.66
1.89
3.32
2.24
RoA (%)
FY16
1.56
1.89
1.77
1.18
1.69
2.03
1.07
1.07
0.85
0.47
0.70
0.57
0.23
0.62
0.46
0.56
0.62
0.56
0.54
0.55
0.58
0.36
2.60
1.50
1.27
3.91
2.41
2.02
1.75
3.22
3.06
2.18
2.32
3.01
FY17
1.58
1.86
1.80
1.49
1.75
2.09
1.15
1.12
0.92
0.59
0.76
0.70
0.36
0.67
0.53
0.64
0.69
0.67
0.64
0.62
0.69
0.44
2.60
1.56
1.29
3.79
2.36
2.19
1.83
3.23
3.12
2.48
2.47
2.91
RoE (%)
FY16
15.0
18.4
18.0
13.9
19.9
18.0
11.8
12.0
10.7
8.2
11.7
9.2
5.6
11.9
9.4
11.7
11.1
8.7
12.3
10.3
9.5
7.7
23.6
20.3
15.6
32.3
31.9
16.3
8.8
22.9
20.3
14.7
14.2
19.1
FY17
15.6
19.2
18.4
14.5
21.3
16.8
14.1
13.6
12.1
10.5
13.0
11.6
9.2
12.8
10.9
13.7
12.6
10.9
14.7
12.2
11.9
10.0
24.4
21.4
17.3
33.5
32.8
19.8
9.8
22.9
20.2
16.5
15.6
18.3
(INR) (USDb) FY16
273
24.8 21.8
1,024 40.3 49.1
494
18.4 36.7
640
18.4 20.3
758
5.0
60.6
900
8.2
41.8
126
0.6
6.9
60
1.6
5.7
91
0.7
14.1
20
0.4
2.2
118.4
237
28.1 25.5
136
4.0
19.5
139
1.4
22.5
183
1.3
20.7
267
2.2
51.2
171
1.7
35.4
129
0.6
50.8
125
0.9
23.6
47
0.1
16.5
62
0.6
17.8
57
1.4
14.4
39
0.3
9.7
42.7
1,196 29.6
38
441
3.5
34
221
1.0
26
731
4.2
63
237
1.4
7
635
0.6
23
130
3.2
10
253
3.9
63
227
4.7
54
872
3.1
65
236
2.1
15
5,200
4.3
214
61.7
FY16 FY17 FY16 FY17
9.6
7.7
132
150
20.9 17.3 285
330
13.5 11.3 218
254
31.6 23.4 184
211
12.5 9.9
328
389
21.5 17.3 287
332
18.3 13.4
62
71
10.6 8.5
50
55
6.5
5.3
136
150
9.2
6.5
28
31
17.2 14.3
8.8
7.1
229
255
7.0
5.1
220
244
6.2
3.5
412
444
8.8
7.4
182
201
5.2
4.0
578
629
4.8
3.7
317
355
2.5
2.0
478
526
5.3
3.9
280
304
2.9
2.2
141
158
3.5
2.7
180
196
3.9
2.9
157
173
4.0
2.9
130
141
7.2
5.6
19.8 15.3 167
192
12.9 10.3 182
217
8.4
6.7
179
204
11.7 9.7
208
239
34.0 26.8
24
30
27.7 19.5 150
179
13.3 11.2 107
116
4.0
3.3
302
360
4.2
3.6
285
330
13.4 10.8 460
524
15.7 12.8 111
125
24.3 19.5 1,342 1,566
14.4 12.2
*Multiples adj. for value of key ventures/Investments; For ICICI Bank and HDFC Ltd BV is adjusted for investments in subsidiaries
16 September 2015
9

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