Capital Small Finance Bank plans 220 branch network in North India by FY 2021

Mumbai: Jalandhar-based Capital Small Finance Bank is planning to expand across North India, as the country’s first small finance bank transitions from its previous avatar as a local area bank.

The bank, which completed the conversion to a small finance bank in April, is working on a blueprint to open 220 branches by the end of fiscal 2021. This will mean a compounded annual growth of 33.8% in the bank’s balancesheet over the next five years, chief operating officer Munish Jain said.

Founded in 2000 as Capital Local Area Bank, it operated in the three districts of Jalandhar, Kapurthala and Hoshiarpur till 2013, before venturing into Ludhiana and Amritsar.

It currently has 57 branches in Punjab with 31 in rural areas and the rest in urban and semi-urban areas. The bank plans to open 19 more branches in Punjab and Chandigarh region by end of this fiscal, according to its website.

Over the next five years, the bank intends to cover the entire northern region, said Jain, while adding this will entail some additional capital raising, which will be undertaken as part of the normal course of business.

“Capital raising (tier 1 and 2) will be considered as a part of business growth along with 33.8% compound annual growth rate in overall business,” said Jain.

In September 2015, the RBI gave in-principle approval to 10 entities to launch small finance banks within 18 months. Among the list was Ujjivan Financial Services Ltd and Equitas Holdings Ltd, which went public earlier this year before turning into small finance banks. Equitas plans to complete the conversion process by September 2016 while Ujjivan hopes to become a small finance bank by the first quarter of calendar year 2017, according to management comments at the time of their respective IPOs.

According to the RBI guidelines issued in November 2014, the objective of a small finance bank is to boost financial inclusion by offering credit to small business units, micro and medium enterprises. The guidelines state that 75% of their loan portfolio must go towards the priority sector and at least half of the loans will be below ₹ 25 lakh.

According to Jain, Capital Small Finance is already compliant with priority sector norms.

“The focus of Capital Small Finance Bank will be to provide services to the priority sector, which forms over 80% of loan book. Agriculture, small and medium enterprises, and mortgages formed 40%, 22% and 14% of the advances portfolio respectively as of 31 March, 2016,” Jain said, adding in agriculture, it lends primarily extends crop loans.

As of 31 March, Capital Small Finance Bank had advances of ₹ 1,148 crore, up 23.57% from a year ago, and a deposit base of ₹ 1,814.13 crore, up 20% from a year a go. Unlike most other small finance bank licensees which could not take deposits in their earlier avatars, Capital Small Finance Bank was a deposit-taking entity as it held a local area bank licence.

CASA deposits are around 36% which helps to maintain a 3.5-4% net interest margin, Jain said. CASA ratio is the ratio of current and saving accounts deposit to total deposits available.

“The Capital Small Finance Bank was already a bank, albeit with limited geographical coverage. Now, within the regulatory framework prescribed for SFBs, it has the opportunity to both widen and deepen its market presence. That said, building a retail liabilities portfolio will be an uphill task. Equally, building an asset book by extending loans to segments which the mainstream banks had largely ignored will not be easy,” said Alok Prasad, founder chief executive officer of MicroFinance Institutions Network.

“The small finance banks will be required to deal with multifarious challenges, including a rapidly changing, highly competitive banking landscape,” Prasad added.

When asked about competition, Jain said there is lot of opportunity to serve clients whose need is between ₹ 1 lakh and ₹ 25 lakh, as commercial banks don’t find this client base viable.