Ujjivan Small Finance Bank, although a new entrant in the banking space—being in business only since 2017—has already made a name for itself. Having already attained significant scale in just seven years, the Bengaluru-based small finance bank (SFB) is now poised to enter the major league, ready to challenge more established players in the banking sector.
The SFB, slated to conclude the current fiscal year with over 750 branches, is strategically expanding its presence into major urban centres to capitalise on low-cost current and savings accounts (CASA) deposits, and a recent branch inauguration in Mumbai’s financial hub near BSE underscores this initiative. Concurrently, the bank is enhancing its service offerings, with a particular emphasis on expanding its mutual funds and gold loan portfolios. Additionally, it is actively exploring avenues to augment the proportion of secured loans within its overall lending portfolio, which presently stands at 28%.
Moreover, the SFB is implementing a comprehensive restructuring of its housing loan product, prioritising accessibility and streamlining turnaround times. This initiative is imperative as the bank faces stiff competition from both the larger banks and also non-banking financial companies (NBFCs).
In fact, highlighting the challenge, Ujjivan’s MD & CEO, Ittira Davis, points out that people still need to be told what an SFB is. “When you look at different banks, SFBs come in between the private and co-operative banks. You still have to explain to people what a small finance bank means,” he says. Davis is the third CEO of the bank in the last seven years.
The SFB’s business model is known to be centred on unsecured micro loans, which enables it to provide higher interest rates to depositors, leveraging the higher pricing of these loans. While this strategy might be prone to greater risks, it not only allows for competitive interest rates on deposits but also enhances profit margins.
But within this business model for an SFB, how does Ujjivan’s strategy fit in? Davis explains that getting a deposit-taking licence was an important step for the bank.
“By getting a deposit-taking licence as a bank, we were able to manage the liability side of the balance sheet. The premium we pay vis-à-vis others is primarily because of the differentiated licence we have. Even an HNI (high net worth individual) who wants a higher interest rate can come to us. They can put some portion of their funds with us and to that extent we serve that customer as well,” he says.
At the close of the Q3FY24, the bank’s CASA ratio was reported at 25.5%. “The difference is that we are taking credit risk and if you know how to manage credit risk, then that is going to differentiate between somebody who is doing well and not so well,” Davis explains.
Currently, the bank’s asset mix includes micro group loans (56%), individual loans (16%), affordable housing (16%), and MSMEs (5%).
The bank is also coming to the metros with an eye on deposit mobilisation—the recent branch openings in cities like Mumbai and Delhi is a case in point.
“These are not big branches and the main purpose is deposit taking. If later on we find that there is demand for other products, we will introduce them gradually,” says Davis.
Furthermore, it is also focussing on improving the quality of its loan book by enhancing the share of the secured loans as the current mix is around 72:28 (72% being unsecured).
This assumes significance as its competitors, such as Utkarsh Small Finance Bank, Jana Small Finance Bank, among others, currently have a higher share of secured loans in their respective portfolios.
“If you are in micro finance, you have to do unsecured portfolio. Once you graduate to a bank, the comfort level changes and you may have to do 60:40 (60% unsecured and the rest secured) which we are aiming to achieve in the next three years,” says Davis.
But that’s not the only thing it is aiming to do. Gold loans, mutual funds, housing loans and even tying up with fintechs are high on the bank’s radar.
“We are trying to provide as many services and across a bigger spectrum so that they [customers] stay with us,” says Davis.
In the realm of housing loans, which constitute 15% of the bank’s total loan portfolio, the bank has revamped its offerings by introducing a hub-and-spoke model. This initiative aims to expand its customer reach and streamline processing times for improved efficiency.
“It is like a hub-and-spoke model in bigger cities…by end of the current fiscal we will have 16 such centres and we will add a few more every year,” says Davis.
As per Davis, the partnership with fintech firms is for lead generation, with the bank conducting thorough due diligence. Additionally, the bank has ventured into capital market services, having already collaborated with SMC Global for demat services. Next in line is the exploration of mutual fund offerings, with plans underway for potential partnerships. “We will tie up with some mutual funds as well. Setting up a mutual fund business and managing it is an expensive business so we can partner with experts who are already doing it,” says Davis.
According to Shreyansh Shah, research analyst at the brokerage firm Stoxbox, Ujjivan’s resilience is evident in the fact that it has maintained margins at 8.9% in 9MFY24, despite facing challenges in the market. “Looking ahead to FY24, we anticipate the bank to sustain net interest margins around 9% through proactive loan repricing measures. However, the intensifying competition in the SFB space presents a potential challenge,” says Shah.
And, it seems that the market is also betting big on the banking entity. In the last one year, shares of Ujjivan SFB have more than doubled even as the benchmark 30-share Sensex has moved up by around 23%. Even the BT-KPMG jury was impressed, picking it for the Best Indian Bank in Innovation award. Plus, the bank was also adjudged the Best Small Finance Bank based on a quantitative analysis. 
@ashishrukhaiyar