Ujjivan Small Finance Bank, which had reported a 111 per cent jump in net profit at Rs 93 crore in the September quarter due to higher business growth last week, is now in the spotlight for some procedural lapses red-flagged by the RBI. Last week, the bank received SEBI’s go ahead to raise Rs 1,200 crore through an initial public offer (IPO). In its Draft Red Herring Prospectus filed with the regulator in August, Ujjivan noted that the apex bank had carried out its most recent inspection (for 2017-18) between January and February 2019 and made a few observations ranging from non-compliance with Priority Sector Lending norms to the lack of a fraud management system.
In a regulatory filing, the small finance bank (SFB) noted that it is subject to periodic inspections by the RBI under the Banking Regulation Act and the RBI Act, pursuant to which, the RBI advises on issues related to various risk and regulatory non-compliances. Some of the areas red-flagged by the banking regulator in the inspection report were:
1. The lack of a system to tag PSL advances, miscategorising of PSL advances, and earning of processing fees on PSL loans
2. Lack of a rating methodology to assess borrowers
3. A high proportion of bulk deposits, and concentration of deposits in the SFB’s top 20 depositors
4. Certain asset centres offering liability products without RBI approval
5. Weak customer grievances redressal mechanism and deficiencies in AML and KYC protocols
6. Discriminatory interest rate on a particular date for deposit of the same tenor and same amount. The RBI also noted that the rate of interest mentioned in certain sanction letters were different from those mentioned in the loan agreements
7. Non-optimising of core banking software customised for micro-loans
8. The lack of an independent compliance department
Significantly, the prospectus lists the RBI’s observations under the section on “Risks relating to our [Ujjivan’s] business”. The prospectus claimed that the bank has responded to such observations and addressed them. “Moreover, for certain observations even provided a timeline by which they would be resolved,” it added. That’s something prospective investors should take note of.
After the IPO, Ujjivan Small Finance Bank will join listed peers like AU Small Finance Bank. Earlier this month, Kerala-based CSB Bank, formerly known as Catholic Syrian Bank, received Sebi’s go-ahead to launch an initial share-sale.
In order to encourage competition, in September, the RBI put up the ‘Draft Guidelines for ‘on tap’ Licensing of Small Finance Banks in the Private Sector’ on its website for comments of stakeholders and members of the public. One of the conditions mentioned in the draft is that listing will be mandatory for an SFB within three years of reaching a net worth of Rs 500 crore. Ujjivan completes three years of operations early next year.
Meanwhile, Ujjivan Bank, in a clarification, said the RBI conducts financial inspections for banks annually for ensuring better processes and controls. “USFB’s
performance, governance and operations continue to be robust. Most of the observations are operational in nature and pertain to the RBI inspection for the financial year 2017-18 (first year of banking operations of USFB). USFBis regularly updating RBI on the working progress.”
The bank said it was earlier classifying PSL loans manually based on reports. “Most of USFB’s loan accounts are currently tagged online,” it added. The bank said its loans did not qualify were removed from PSL classification. “Processing fees collected on these accounts were refunded to customers,” it added. The clarified that a small proportion of USFB’s agricultural loans had been mis-categorised as PSL advances based on erroneous land holding data. “These cases had been re-classified as non-PSL advances,” it said.