Suryoday small finance bank

Investment thesis of Suyryodaya Small Finance bank:

Disclaimer: You can assume I am biased.

Founder is doing few things which I find it exceptional

• Unsecured loans [MFI] will be profit maximizing segment and secured loan business will provide stability and scalability to the business.

No other bank or NBFC has either taken a) CGFMU insurance cover or b) Creating Countercyclical provision of 5-6%

• By taking CGFMU cover its converting unsecured loans into Quasi secured loan and fixing the maximum loss at 3% of book [provided total NPA remains maximum at 15%].
• Counter cyclical provision : Bank is planning to create an additional contingent provision over and above regular provision. Bank wish to create 5% to 6% contingent provision by FY2026 by creating 1.5% contingency provision every year. [i**n addition to taking CGFMU cover, so in effect even in case of 20% credit cost event, bank will suffer only 3% credit cost in that year]**

• In case of Secured loans, majority of current book is focused on credit tested customers and accordingly yields are restricted to 12-13%. At the same time management has launched and testing various high yields products like Micro housing loans, Micro LAP, Small Business loans etc.
• Its not building extensive liability branches and not spending disproportionate amount in raising CASA. On the contrary in will rely on granular term deposits and other stable sources of finance. This will help it to keep the Opex low. Almost everyone is worried about whether Suryoday can build low cost CASA, but its immaterial. What is required is can they build granular book, even at 1-2% extract cost compared to top bank. Suryoday cannot match the low cost of funds of top private banks and PSU banks atleast for next 7-10Y. When business model is based on serving underserved and unserved customers and not prime customers like top private banks, then CASA is NOT MUST to have BUT ONLY GOOD TO HAVE. What is MUST IS Granular liabilities and NOT dependence on WHOLESALE LIABILITIES.

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