Mumbai: Utkarsh Micro Finance Pvt. Ltd has raised Rs395 crore from domestic institutional investors in an effort to lower the foreign holding in the company below 49% and help the microlender in the transition to a small finance bank, said a senior executive.

Utkarsh is one of the 10 non-banking financial companies (NBFCs) that won a licence for a small finance bank.

The microlender raised Rs395 crore from institutional investors such as HDFC Standard Life Insurance Co. Ltd, HDFC Ergo General Insurance Co. Ltd, ICICI Prudential Life Insurance Co. Ltd, Shriram Life Insurance Co. Ltd, RBL Bank Ltd, Small Industries Development Bank of India and private equity funds Faering Capital and Arpwood Capital, said Govind Singh, managing director, Utkarsh Micro Finance.

ICICI Securities and Avendus Capital advised Utkarsh Micro Finance on the fundraising.

With the latest infusion of capital, the foreign shareholding in the company will fall below 49%. Companies with small bank licences are trying to lower foreign investor holding to meet Reserve Bank of India (RBI) guidelines; larger firms have opted for initial public offerings (IPOs) to meet the objective.

RBI issued small bank licences to 10 entities in September 2015 with a time frame of 18 months to convert to banks. Small finance banks will offer basic banking services, accepting deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries, and entities in the unorganized sector.

Utkarsh plans to launch its small finance bank operations by January 2017, said Singh.

“We are in advanced stages of the rollout. We expect to receive the final licence from RBI and the other regulatory approvals in the next three months. So, we plan to formally launch sometime in the month of January," he said.

Utkarsh operates in Uttar Pradesh, Bihar, Jharkhand, Maharashtra, Madhya Pradesh, National Capital Region, Uttarakhand, Himachal Pradesh and Haryana.

“Initially, our focus will be on UP and Bihar with around two-thirds of branches in these regions," said Singh.

Utkarsh will add 125 new branches for the launch of the small finance bank operations. The company currently has a network of around 325 branches.

Under the small finance bank model, the company will focus on the micro, small and medium enterprises as well as affordable housing finance, in addition to its core product of microfinance, which is essentially lending to the poor and unbanked.

“Currently as a microfinance institution, we are doing microfinance lending through the JLG (joint liability group) model only. We also have a small portfolio of MSME lending and housing finance, but which is currently only about Rs100 crore of our almost Rs1,800 crore loan book," said Singh.

In the next five years, the company will look to increase contribution of MSME lending and housing finance, he said.

“We would look to have a mix of 50% of loan book from microfinance, 30-35% from MSME lending and the rest from housing finance and other products," Singh said, adding that Utkarsh will look at adding other loan products to its portfolio, such as agriculture equipment financing, a year or two after the small bank’s launch.

According to Singh, Utkarsh’s biggest priority would be to attract customers for savings accounts and deposits. “We plan to make available all products, such as current account, savings, fixed deposits, recurring deposits and all third-party products, from day one," he said.

According to Singh, Utkarsh will target raising Rs2,000 crore of deposits in the first one-and-a-half years of operations.

According to experts, the liability side of business will be the biggest challenge and priority for small finance banks.

“Raising deposits at a scale and cost that makes business sense will be the biggest challenge. As an altogether new kind of financial services entity in the market, SFBs (smalls finance banks) shall have to build trust and a customer connect for being able to attract deposits. This, inevitably, will be a slow, time-consuming (process)," said Alok Prasad, an independent industry expert and former chief executive officer of industry body Micro Finance Institutions Network (MFIN).

The transition to a small finance bank will also see some of the existing investors exit Utkarsh. Existing investors include Aavishkar Goodwell, Lok Capital, Commonwealth Development Corp., International Finance Corp. (IFC) and Norwegian Microfinance Institution (NMI).

“Aavishkar and NMI will be making a complete exit, while IFC will part exit its stake," said Singh, adding that discussions on these secondary transactions are underway and are expected to be completed over the next month-and-a-half.

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