RBI flags shortcomings at Ujjivan Small Finance Bank

Mumbai: In its recent inspection report the Reserve Bank of India has made certain observations regarding Ujjivan Small Finance Bank’s lack of fraud management system, rating methodology and categorisation of priority sector loans among many others. The bank has filed initial papers to raise Rs 1,200 crore via an initial public offering (IPO) in August.

Under the condition for small finance bank (SFB) licences issued by the Reserve Bank of India, SFBs will be required to list after three years of operation with a capital of Rs 500 crore or above. Ujjivan will complete three years of operations on January 31, 2020.

It will use the funds to augment capital base and meet future requirements. Ujjivan Financial Services raised Rs 300 crore in February from a clutch of investors, including HDFC Life and Sundaram MF, in a pre-IPO placement. The the company was valued at about Rs 2,000 crore at the time of the fund raising.

The RBI inspection was conducted between January and February 2019, for financial year 2017-18. In the papers filed with the stock exchange, Ujjivan said that RBI pointed out lack of a system to tag priority sector advances, high proportion of bulk deposits and concentration of deposits of our top 20 depositors.

It also observed that liability products were being offered from certain centres without RBI approval. In its draft red herring prospectus, Ujjivan mentioned RBI has pointed out deficiencies in AML, KYC protocols and lack of an independent compliance department.

The regulator noticed discriminatory interest rate on a particular date for deposit of the same tenor and same amount. Also, the rate of interest mentioned in certain sanction letters were different from those mentioned in the loan agreements. Ujjivan is non-optimising of core banking software customised for micro-loans.

AU Small Finance Bank had a successful listing last year. Equitas Small Finance Bank is another SFB looking to list to meet RBI’s norms. Failing to meet the norms, RBI froze the pay of CEO and barred the bank from opening new branches.

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. As disclosed on page 28 of the DRHP, UFSB has submitted responses to these observations made by RBI. USFB is regularly updating RBI on the work in progress.