FINCARE SMALL FINANCE BANK LIMITED IPO

Fincare Small Finance Bank follows a customer-centric business model, focused on financial inclusion. It aims to provide individuals and businesses with affordable financial products and services that meet their needs. The company is a "digital-first" bank and has been an early adopter of scalable digital solutions in order to improve customer experience and/or operational efficiencies. The company uses a combination of proprietary and third-party digital solutions, with the aim of developing in-house digital solutions that are core to its business and buying those that are commoditized or non-core to its business. It has implemented automation across a number of areas including: (i) business intelligence and analytics, (ii) compliance, (iii) credit quality monitoring, (iv) document management, (v) internal and external process and service requests, (vi) human resource management, including payroll, leave, performance management and training, (vii) sales and marketing activities, (viii) tablet based customer onboarding, account opening and account servicing, and (ix) payments.

Financial inclusion is at the core of Fincare Small Finance Bank’s business and its objective is to enhance access to products such as savings accounts, microloans, loans against gold, insurance and investment products for unbanked and under-banked individuals, MSMEs and unorganized entities through high-tech, low-cost operations. As a majority of its customers are individuals from low-income groups and lack financial sophistication, the company has designed its products in a manner such that they are simple to understand, which contributes to their popularity with customers. Further, it has a deep rural franchise and experience of over 15 years in microfinance. As of March 31, 2022, the company covered 48,542 villages, with 2,391,850 base-of-pyramid households and 2,352,093 rural savings accounts. Through this extensive rural network, as of March 31, 2022, 93.44% of its customers were in rural areas. In rural areas, its key competitive differentiator is that it provides loan products covering the full lifecycle of rural customers, delivered using digital tools. In this regard, the company has continuously expanded its product suite to meet additional financial needs of its customers, through products such as rural loans against property, loans against gold, two-wheeler loans, and savings products. These products are tailor-made to address the needs of its customer base.

Fincare Small Finance Bank reaches its customers through a diversified, extensive multi-channel network combining traditional brick-and-mortar banking outlets and digital banking. This allows it to offer "last mile, doorstep connectivity" to its customers while maintaining low operating costs. As of March 31, 2022, it had a pan-India network of 919 banking outlets (including 246 business correspondent outlets) and 125 ATMs of which 90 were cash recyclers, spread across 14 states and three union territories, covering 255 districts, which together covered over 48,542 villages and reached 3.26 million customers. As of Fiscal 2022, the company was one of the two SFBs in India with the highest number of banking outlets (Source: CRISIL Report). Its banking outlets are either operated by the company or by business correspondents appointed by it, which provide it with a low-cost means of extending the company’s distribution reach. Its extensive distribution network provides it with meaningful geographic diversification in its deposit and loan portfolio.

In Fiscal 2018, Fincare Small Finance Bank commenced small finance bank operations, which provided it with access to a low-cost deposit base and also allowed it to expand the scope of its lending operations. The company’s deposit products include term deposits, recurring deposits and CASA. As of March 31, 2022, it had 4.03 million deposit accounts (including 0.24 million 101 accounts), representing a CAGR of 442.30% since March 31, 2020, covering both existing microloan customers and new-to-bank customers, especially in urban areas. As of March 31, 2022, it had 2.85 million deposit customers, representing a CAGR of 14.01% since March 31, 2018.In Fiscal 2022, the company had the second-highest deposit growth among its SFB peers and the third highest ratio of retail deposits to total deposits (Source: CRISIL Report). Its total retail deposits (including retail term deposits and CASA) as of March 31, 2020, 2021 and 2022 were ₹ 35,789.27 million, ₹ 46,423.80 million and ₹ 53,011.00 million, respectively. Through its efforts, its credit-to deposit ratio improved from 103.47% to 109.00% and its CASA ratio improved from 11.93% to 36.30%, in the period between March 31, 2020 and March 31, 2022.

Fincare Small Finance Bank follows robust risk management policies, which aim to maintain healthy asset quality and low credit costs for the company. It recognizes risk management as an integral part of its business and management practices. The company has formulated its risk management policy taking into account, among others, the practices and principles governing risk management prescribed by the RBI. The company has certain key risk mitigation policies in place for various types of risk:

• Operational risk: The company caps its portfolio exposure at state and district levels; has a strong valuation framework for LAG; have audit checks and tight controls and conducts field monitoring of its banking outlets.
• Credit risk: The company conducts customer due diligence; has a stringent customer onboarding process encompassing layers of checks done by center managers and first level supervisors; and it assigns rating scores to customers.
• Internal audits: The company has a comprehensive internal audit mechanism covering credit, business, branches, process, information security and concurrent audit.
• IT risks: It has a robust IT system for monitoring risks.

While Fincare Small Finance Bank will continue to pursue opportunities to grow its microloan portfolio, its focus is now also on scaling up its other lending products. Secured products would allow the company to build a more diversified lending portfolio. Its loans against property, loans against gold, two-wheeler loans, affordable housing loans and institutional finance loans are all secured loans, as compared to microloans, which are traditionally unsecured. Fincare Small Finance Bank intends to scale up its mix of these products by introducing them at banking outlets that have not historically offered them, through improved productivity at its existing banking outlets as well as through the addition of new banking outlets. The company also intends to focus on crossselling its capabilities to existing and new customers going forward, with the objective of expanding its business. A significant portion of its asset customers opt to open savings accounts with the company for new disbursements, which provides it with opportunities to cross-sell deposit products to them. Further, the company intends to cross-sell additional loans such as two-wheeler loans, loans against gold and loans against property to its existing borrowers who have demonstrated good repayment histories and require higher ticket loans. Further, the company may also offer loans in other categories such as supply chain financing and commercial vehicle loans to borrowers falling within this category. It also intends to broaden its sale of fee-based products.

Fincare Small Finance Bank is focused on diversifying its liability profile, particularly through building a stronger CASA and retail term deposit franchise. The company is focused on CASA and retail term deposits as they are, typically, lower cost funding sources than bulk deposits and other, non-deposit-based, sources of funding, such as refinancing, interbank borrowing, securitizations and the issuance of debt securities. The company intends to take a multi-pronged approach to source more CASA and retail term deposits, in part through an emphasis on mobile banking to encourage customer loyalty and crossover into these products. To this end, it aims to introduce short-term loyalty programs, such as providing cash back offers to customers who use their debit cards more often; encouraging customers to maintain higher balances and also use their accounts for purposes such as recurring bill payments

While Fincare Small Finance Bank has a robust digital platform today, the company intends to continue investing in digital offerings that are scalable, improve customer experience and improve its profitability. Its digital strategy has many facets, including further scaling up cashless banking, deepening automation and analytics capabilities and incentivizing the use of digital channels. The company is pursuing a number of initiatives to deepen its automation and analytics capabilities. The company intends to use data analytics to help identify potential new product segments that may be popular amongst its target customer segments, and to promote cross-selling opportunities. It also intends to use data analytics to provide early warning signals for customers at risk of nonrenewal in order to improve customer retention, and to use predictive analytics based on GST payments and client income to further enable loan sanctioning to first time SME borrowers. The company also intends to introduce new algorithms for automated underwriting decisions and alternate-data-based underwriting. Further, Fincare Small Finance Bank is pursuing automation of areas that can have the greatest impact on its customers or its costs, such as low value customer interactions and backend processes.

Fincare Small Finance Bank intends to enhance the utilization of its existing banking outlets, in order to add loans and deposits without having to make significant further investments in these outlets. To do this, the company intends to optimize the size, number of centers and geographical coverage of its micro banking outlets, establish well-defined geographical limits of operations, implement productivity and other automation tools, roll out loan products to banking outlets that do not currently offer them, and train and empower staff engaged in customer-facing roles to improve sales and service understanding. With a view to enhancing productivity of its banking outlets, the company aims to increase the contribution of liabilities from urban and semi-urban centers to target the urban poor, providing them remittance and payment services in addition to deposit accounts. On the assets side, it intends to source additional customers for its microloans, two-wheeler loans and loans against property, largely in geographies where it currently does not operate, through its business correspondent partners. In addition to increasing banking outlet utilization, it intends to further expand its network of banking outlets, focusing particularly on its existing geographies and those adjacent to them, whether rural or semi-urban, though also selectively expanding in key markets to source deposits.

Fincare Small Finance Bank seeks to leverage and enhance its brand to build its presence in the banking sector and enhance customer trust and recognition. The company seeks to build its brand by maintaining official social media pages on popular sites; regularly posting on those platforms about updates and new initiatives; leveraging its brand ambassador Chess Grandmaster Viswanathan Anand for online and offline marketing campaigns; conducting customer events; conducting marketing through TV, radio and print ads; and marketing through brand associations and event sponsorships.

He holds a bachelor’s degree in commerce from Jodhpur University. He is also a chartered accountant with the Institute of Chartered Accountants of India. He is currently associated with True North Managers LLP.

He holds a bachelor’s degree in technology from the Indian Institute ofTechnology, Kanpur, and a post graduate diploma in management from the Indian Institute of Management, Ahmedabad. He was previously the chief executive officer of G.E. Money Financial Services Private Limited.

He has a Bachelor’s degree in science (mathematics) from Maharaja Sayajirao University, Baroda and Master’s in business administration from University of Pune. He is one of the founders of the company. He was previously a partner at Disha Support Services.

• A substantial portion of its banking outlets are located in and a significant portion of its advances originate from four states, making it vulnerable to risks associated with having geographically concentrated operations.
• The company faces the threat of fraud and cyber-attacks targeted at disrupting its services, such as hacking, phishing and trojans, and/or theft of sensitive internal data or customer information. This may cause damage to its reputation and adversely impact its business.
• The company may face risks associated with its large number of banking outlets and extensive network and its reliance on third-party service providers including business correspondents operating banking outlets, which may materially and adversely affect its business
• The company relies extensively on its information technology systems and any unforeseen internal or external disruptions may have a detrimental impact on its operations.
• The business is highly competitive, which creates significant pricing pressures for the company to retain existing customers and solicit new business.

• Customer-centric approach driven by digital banking and automation.
• Strong commitment to financial inclusion with extensive rural franchise and expanding urban presence.
• Multi-channel, low-cost distribution network with diversified geographic presence.
• Fast-growing stable deposit base with a growing CASA franchise.
• Robust risk management policies, leading to healthy asset quality.

• It relies on deposits as a low-cost means of funding a substantial portion of its loan portfolio and there is no guarantee that it will be able to source enough deposits or alternative funding to support its business.
• The company is required to extend a minimum level of advances to certain sectors, has regulatory limitations on the percentage of its onbook advances above a particular loan size, and must maintain a prescribed cash reserve ratio, statutory liquidity ratio and minimum capital to risk-weighted assets ratio, each of which may have an adverse effect on its business operations.
• The company may face asset-liability mismatches, which could affect its liquidity and consequently may adversely affect its business and financial condition including liquidity.

• Although the majority of Indian households are located in the rural regions, the banking infrastructure in these regions is relatively inferior and, thus, there is a gap in the supply and demand of financial services in the backward regions of the country, which is a pocket of opportunity for the company.
• CASA and other retail deposits are a cheap source of funds for SFBs, which help them expand their product portfolio. They can provide lower rates in the market to compete with NBFCs. With SFBs expanding in the underserved regions further, their deposit base is expected to further widen. The CASA deposits for SFBs have grown at 76% CAGR form Fiscal 2018 to Fiscal 2022.This will give them an advantage over NBFCs and help expand their asset book.

• The company is significantly dependent on its microloan business, which has its own unique risks and, as a result, it may experience increased levels of non-performing loans and related provisions and write-offs that may materially adversely affect its business.
• The business is vulnerable to interest rate and investment-related risks. Volatility in interest rates, value of investments and other market conditions could adversely affect its net interest margin, the value of its fixed income portfolio, its income from treasury operations, the quality of its loan portfolio and its financial performance.
• An increase in its portfolio of non-performing assets may materially and adversely affect the business, financial condition and results of operations.