Capital Small-Finance Bank: Leading the charge

Having set out on its journey as a small finance bank in 2016, Capital Small-Finance Bank (CSFB) has made strides in the banking sector in just a few years. 

At the core of its business model is robust credit assessment and risk management processes. Centred on secured lending for most of its advances, backed by conservative loan-to-value ratios, the bank has maintained a high-quality loan book with low delinquency rates. Its processes combined with its strategic focus on secure lending has been key to its growth as well.

“We maintain a comprehensive view of, and control over, our customers’ cash-flows, enabling us to carry out effective credit assessments. This approach has been instrumental in improving our asset quality and lowering our NPA,” says Sarvjit Singh Samra, MD & CEO, CSFB. “Our ability to stay connected with customers and understand their needs has earned us their trust at all times, which is our USP,” he adds.

The bank points out that customers prefer a single source for various financial services and, accordingly, offers a range of credit and non-credit products and services to address a variety of financing requirements through its branch network. “Our products are designed keeping in mind simplicity and ease for our middle-income customers. This approach, combined with our focus on customer engagement, has helped us build and maintain a strong customer base,” says Samra.

CSFB has expanded the number of its customers to 701,071 over the years (credit and deposit customers), supported by 170 branches and 172 ATMs. Interestingly, 76 per cent of these are located in rural and semi-urban areas, which speaks volumes about the bank’s commitment to serving the financial needs of underbanked regions.

“We have always been focussed on serving underbanked regions in India. We have found that, by staying connected with our customers and providing them seamless banking services, we can build long-term, loyal customer relations, and keep our growth focussed and strong,” says Samra. Besides, most of its customers belong to the middle-income group.

CSFB has designed its products in a manner that makes them simple and easy to understand, enhancing their appeal to customers. It has dedicated relationship managers as also personal and retail bankers at its branches to address the diverse needs of customers.

Further, a distinct advantage that worked in its favour was the fact that it operated as a local bank and was one of only two non-microfinance entities before 2016. This previous experience as a local area bank meant that it already operated in diverse segments, and led a deep understanding of the systemic risks and a good handle on customer segments.

As a local area bank, its transition was smooth. Initially, it was three districts of Punjab but, after conversion, it is spread across Punjab; and, now, it is also present in Haryana, Delhi. Rajasthan and Himachal.

Besides, moving to diversified products was less of a challenge and more a growth opportunity for CSFB. This is because the systems, processes, and technical expertise needed for these products were already in place. All this enabled it to lever its abilities and maintain a competitive edge.

Granular growth

The bank has built its business granularly over the years, as the focus has been on income generation, while its emphasis on local hiring ensures that it stays tuned to the needs and aspirations of the communities it serves. At the same time, 99.82 per cent of its loan book is secured, with 85.16 per cent of these being backed by immovable properties. This prioritisation of secured lending is key to its risk-mitigation strategy, which makes its figures among the best of all small finance banks.

Moreover, the bank created a well-diversified portfolio spanning various sectors such as agriculture, MSME and trading, mortgage lending and other products. This diversification not only mitigates risks but also optimises resources. “We have granular balance sheet on both sides. On the asset side, our lending is secured more than 99 per cent,” affirms Munish Jain, chief operating officer & chief financial officer, CSFB. “On the liability side, we are a focussed retail liability franchise with deposits constituting more than 89 per cent of our total liability and 98 per cent of this is retail deposits. Our target segment is clear: ours is a middle-income-group-focussed bank. Our ethos revolve around a simple principle: Our liabilities are our biggest assets. The trust placed in us by our depositors is invaluable”.

Reflecting the target market, the average ticket size for its loan book agricultural loans is Rs12.35 lakh; for MSME’s trading loans, it is Rs18.16 lakh and, for mortgage lending, it is Rs11.61 lakh. CSFB has made strategic forays into three major asset segments – MSME trading, housing and agriculture. It empowers the cash flow needs of MSME traders, facilitating the automation of their working processes and providing credit in its sweet spot range of Rs10-200 lakh.

In the mortgage market, CSFB’s focus is bifurcated between housing and loans against property (LAP). Catering primarily to the middle-income group, the bank provides housing loans for both the purchase and construction of homes, and LAP to self-employed individuals. The bank extends its services to the agricultural sector, offering loans specifically tailored for farmers’ needs of Rs5-25 lakh. 

No surprise then that the bank has grown at a sound clip. CSFB’s advances have increased at a fast clip to Rs5,507 crore in 2022-23 from R3,326 crore in 2019-20. Deposit growth, on the other side of the balance sheet divide, has been equally strong, rising to Rs6,561 crore in 2022-23 from Rs4,447 crore in 2019-20.

Financial performance

While the bank has expanded operations to newer and contiguous regions, resulting in more customers and better operational and business metrics, the expansion led to consistent growth in key financial parameters such as total advances, deposit growth and profitability. “We have been able to sustain a steady growth trajectory while improving operational efficiency”, informs Jain, adding that for instance, “our operating profit has registered a 55 per cent CAGR from 2019-20 to 2022-23”. 

Another highlight of its financial performance is its efficiency ratios. Its returns on assets and equity were respectively 1.22 per cent and 16.62 per cent for 2022-23, increasing substantially from 0.92 per cent and 12.95 per cent in 2021-22.

Besides, its legacy of two decades has influenced the evolution of its credit assessment processes and lending policies. There is a long-standing emphasis on ensuring superior asset quality, which is a testament to the six strategic pillars the bank adheres to. This is reflected in its non-performing assets (NPA) performance.

With a current account to savings account (CASA) ratio of 41.9 per cent, CSFB stands toe-to-toe with universal banks in terms of its deposit base. Moreover, its record of maintaining above 90 per cent renewals even during the pandemic and offering the lowest interest rates on term deposits among SFBs sets it apart. The bank’s performance in terms of cost of deposit can be compared to universal banks at 4.9 per cent.

Led by an experienced leadership team and backed by reputable shareholders, the bank is poised to continue its growth trajectory while maintaining strong corporate governance.

A pivotal part of its growth strategy lies in its loan book’s organic growth, concentrating on secured lending. “Growth is never by mere chance; it is the result of forces working together. And one of our forces is geographical expansion, deepening our roots in existing markets and venturing into new territories,” says Samra.

According to CRISIL’s Research Report, there is significant scope for expansion, especially in the northern, eastern, north-eastern and central regions for both credit and deposits. The bank intends to take up this challenge. Its strategy involves deeper penetration at its home state of Punjab and expansion to adjacent Haryana, Rajasthan and the National Capital Region (NCR). With deposit penetration in the northern region maintaining a steady 21 per cent share of overall banking deposits, the bank sees immense opportunities for further expansion here.

As part of its expansion strategy, CSFB also plans to form business partnerships in states where its presence is currently not as robust. “Through strategic partnerships, we aim to understand new markets, mitigate associated risks, and diversify our offerings and geographical presence,” says CFO Jain. The bank plans to open targeted branches in urban/ metro areas as part of this strategy.

“The significant growth of our advances underscores our dedication to providing our customers with top-notch financial solutions. Our intent as a primary banker is to offer products to our customers with a special focus on rural and semi-urban areas where believe there is a huge opportunity,” notes Jain.

In addition, the bank has its sights set on organic expansion of its loan book with a clear focus on secured lending. In an ever-dynamic and competitive financial-services landscape, it has carved out a distinct space for itself by focusing on creditworthy segments.

The bank is also raising its bar in improving its financial metrics. “We aim to strengthen our operational profitability metrics chiefly through enhancing our credit penetration,” says Jain. “This move is key to boosting our Net Interest Margin (NIM). Simultaneously, we have a strong focus on optimising our operating costs. As we mature in our operations, the proportion of mature branches will rise, assisting us in reducing costs more effectively. This optimisation is already yielding results, with our cost-to-income ratio showing a steady decline. We aim to augment income from non-traditional banking products (NTP), and remain committed to continually enhancing our product and service offerings”.

With a strong balance sheet and capital ratios, the bank’s financials should easily be able to support its growth in advances. CSFB’s capital adequacy ratio stands at 18.87 per cent in 2022-23. Its net non-performing assets are also below market averages, at 1.36 per cent for 2022-23.

“We are committed to accelerating our growth momentum, while staying true to our mission of helping customers prosper,” acknowledges Samra. “The path ahead is full of opportunities. And, we are well-equipped for growth”.