Ujjivan Small Finance Bank Clarifies On RBI’s Concerns Ahead Of IPO

Ujjivan Small Finance Bank Ltd. said that it has taken steps to address the Reserve Bank of India’s observations ranging from violation of priority sector lending guidelines to lack of a system to detect fraud.

The lender, in an exchange filing Monday, clarified on the central bank’s observations that the bank had listed in its draft red herring prospectus. The RBI had flagged issues as part of its inspection between January and February this year.

Here’s Ujjivan’s response to the observations:

RBI: Lack of a system to tag priority sector advances, mis-categorising and earning processing fee on such advances.

Response: The loans which did not qualify for the priority sector tag were removed from the classification; processing fees collected on these accounts refunded to customers.

RBI: Lack of a rating methodology to assess borrowers.

Response: The bank has a scorecard-based framework for rating borrowers; it’s working on an automation of rating methodology.

RBI: A high proportion of bulk deposits, and concentration of deposits in top 20 depositors.

Response: The concentration has substantially decreased from 73.59 percent as on March 31, 2018, to 30.14 percent as on Sept. 30, 2019.

RBI: Liability products offered from certain centres without the RBI’s approval.

Response: Issue has been resolved.

RBI: Lack of a fraud management system, weak customer grievances redressal mechanism and deficiencies in anti-money laundering and KYC protocols.

Response: A manual fraud-management process is being automated. It has multiple product-based customer grievance redressal mechanisms, and has set up a standard operating procedure for centralised monitoring. It remains committed to strengthening and automating its anti-money laundering and KYC protocols.

RBI: Rate of interest in certain sanction letters different from what’s mentioned loan agreements; discriminatory interest rate on a particular date for a deposit of the same tenor and the same amount.

Response: Necessary control measures put in place.

RBI: Non-optimising of core banking software customised for micro-loans; lack of an independent compliance department

Response: The bank is using Finacle for its liability and other new business verticals like personal loan, housing and small business portfolio; micro banking loans are managed using BR.net system. The systems are well integrated.

Compliance function was reporting to the audit committee of the board and administrative to the chief risk officer. Since February 2019, administrative reporting shifted to managing director and chief executive officer, and is an independent function.

Other Risks

In its draft prospectus for the IPO approved by the market regulator, Ujjivan Small Finance Bank also cited funding needs as a risk. It’s a continuous requirement and inability to raise funds in a timely manner or any disruption in the access to funds would adversely impact operations and financial condition, the bank said.

Some of the hurdles could be market acceptance of the Ujjivan brand and competition from other banks offering higher interest rates, it said. The bank said that it intends to introduce new products and promote these marketing campaigns.

But it said there is no assurance that Ujjivan Small Finance Bank will be successful in growing its low-cost current and savings account deposits. Ujjivan’s CASA ratio stood at 10.4 percent as of June compared with 26 percent for Equitas Small Finance Bank Ltd. and 36.06 percent for Bandhan Bank Ltd.

Ujjivan Small Finance Bank listed increasing competition from existing banks, merger between state-owned lenders, and fintech companies as risks, saying they may affect growth strategy and the company’s share price.

While in its response to exchanges Ujjivan said that it’s strengthening anti-money laundering systems, in its DRHP the lender cautioned that it may not be able to detect money-laundering and other illegal or improper activities in a comprehensive manner or on a timely basis. That, it said, could, expose it to additional liability and “harm our business or reputation”.