Strengthening our way forward
As of now UFSL has over 100000 shareholders and USFB over 200000 both mainly smallshareholders. UFSL shareholders have waited patiently for being integrated into theoperating company and we are hopeful that RBI will permit the reverse merger of UFSL withUSFB when a formal application is made 3 months prior to Bank's 5th anniversary which ison February 01 2022.
The last year has been a very difficult one for all of us both economically and moreimportant personally. I will not elaborate on the effects the pandemic had on the economyand society as these are well known. However a prolonged crisis with repeated wavesimpacts our customers & our employees who are the vulnerable members of our society.We have lost 12 Bank staff and innumerable family members. As on August 25th 2021 thenumber of staff infected & recovered was 2576 and currently 76.4% of our staff hasbeen vaccinated.
The Quick Response Team (QRT) of the Bank has worked literally day & night for last18 months to support the staff & their families for hospitalization in case ofbereavement and organize vaccinations. We on behalf of the UFSL Board would like to takepause to share the grief of the bereaved families & thank the work by the QRT membersacross the country.
FINANCIAL RESULTS: 1. Standalone (UFSL)
As you will be aware Ujjivan Financial Services Limited (UFSL) is a non-operatingholding company with sole 83.32% ownership of Ujjivan Small Finance Bank (USFB) and itdoes not have any other business interest. At standalone level the income streams of UFSLinclude dividend income from investments held in its subsidiary UFSB and interest earnedon fixed deposits invested with various banks. There was no dividend income received onits equity investment held in
USFB since inception of the Bank including during the financial year 2020-21 due torestrictions on declaring dividend by banks as per Reserve Bank of India (RBI). We hadinvested
200 Crores in Preference Shares in the Bank. On this we had received dividend income of11 crores in the previous financial year 2019-20. But for reasons mentioned earlier nodividend income was received this year. However UFSL closed on a standalone level with aprofit after tax of 2.93 crores in comparison to 8.82 crores in previous year. This wasfrom the interest income on bank deposits and a substantial reduction in expenses atstandalone level during the year.
2. Consolidated (UFSL with USFB)
UFSL's consolidated loss (which includes Bank's financials) under Ind-AS for thefinancial year 2020-21 stood at 239.11 crores vis-a-vis profit of 298.65 crores during thefinancial year 2019-20. The loss includes impairment on Financial Assets
Loans based on Expected Credit Loss (ECL) provisions of 1165.16 crores due toCOVID-19 compared to 174.46 crores of provisions in previous year.
The Bank's operating profit under IGAAP prior to provisioning rose from 637.23 croresto 809.30 crores and net profit stood at 8.30 crores vis-a-vis net profit of 349.92crores in the previous year. Provisions on Gross Advances as per IGAAP books for thefinancial year 2020-21 were 798.96 crores vis-a-vis 170.99 crores in financial year2019-20.
It is important to note that UFSL as NBFC is required to prepare its financials as perInd-AS and to provide for bad debt on the basis of ECL methodology however the bankscontinue to provide under IGAAP. The difference between the provision under ECLmethodology as per Consolidated Financial Statements under Ind-AS and provision as perBank Standalone Financial Statements under IGAAP is due to the reason that ECL is computedon expected credit loss following a forward looking approach. This is arrived bydiscounting the future expected cash flows whereas IGAAP provisioning is based onhistorical data prescribed by RBI's prudential norms. This is a rule based provisioningand based on the days past due data.
COVID-19 RELIEF SUPPORT
Although our annual CSR obligations are very small from the financial year 2020-21 andonwards during this hour of need UFSL was willing to support few deserving medicalinstitutions which are in the frontline of COVID-19 treatment for poor patients. Henceconsidering UFSL's standalone profitability and eligibility the Board of Directors ofUFSL approved 50 lakhs fund for this purpose to be spent during the financial year2021-22. Accordingly we have identified and provided financial support to few hospitalsacross India to procure certain medical equipment and related items for treatment ofCOVID-19 patients with help of our CSR partner Parinaam Foundation.
`50 lakhs Fund approved by the Board of Directors of UFSL
REVERSE MERGER AND CHANGES ON THE BANK BOARD INCLUDING MY INDUCTION AS A MEMBER
RBI through its communication dated July 9th 2021 to the CEOs of Association of SmallFinance Banks (SFBs) has conveyed its decision to permit SFBs and the respective holdingcompanies to apply for amalgamation of the holding company with the SFB three months priorto the 5th anniversary of the Bank subject of course to the entities complying with theall regulatory prescriptions. The completion of the process of reverse merger is likely totake one year from the time we get permissions from regulatory authorities including RBISEBI and NCLT.
As of now UFSL has over 100000 shareholders and USFB over 200000 both mainly smallshareholders. UFSL shareholders have waited patiently for being integrated into theoperating company and we are hopeful that RBI will permit the reverse merger of UFSL withUSFB when a formal application is made 3 months prior to Bank's 5th anniversary which ison February 01 2022. With this perspective we must reflect on the shape of the integratedcompany USFB (as UFSL will cease to exist on completion of the said reverse merger). Wewould expect
USFB to carry forward the values of the operating UFSL in particular the financialinclusion and socio- economic goals the people orientation towards employees and itscustomers.
In view of this significant positive development the Board of the Company hasrecommended that I also serve on the Board of USFB as common director (RBI permits UFSL tohave 3 common directors on USFB board) in addition to being the non-Executive Chairman ofUFSL. The Board was of the view that my direct association on the Board of the Bank willbe immensely beneficial for the whole Ujjivan group when the process of reverse merger isinitiated. This is because of my relationship with shareholders & employees of bothentities and also with the regulators. Also my long standing experience in themicrofinance sector and USFB businesses would stand in good stead in guiding the bankmanagement to steer through the severe credit crisis. Accordingly under due process Ihave also become a director on the Board of USFB effective from August 20 2021 and I lookforward to start my new journey as a Non-Executive member of the Bank Board.
Going forward some of the directors and KMPs of UFSL will also move to the Bank afterthe merger. The common trend is now to entrust the operations of a listed company more tothe Board of Directors and less to the "promoter". A SEBI discussion papersuggests replacement of the concept of promoter to one of "Person in Control"based on shareholding and other factors. Today there is no dominant shareholder in
UFSL or the bank (except UFSL) Even after the merger there will be no dominantshareholder in the merged entity. We at UFSL have worked collaboratively with UFSB tostructure the USFB Board with persons of integrity and relevant skill sets who are attunedto the goals and philosophy of Ujjivan. As you would know Nitin Chugh MD & CEO of theBank has resigned effective Sep 30 2021 due to personal reasons and Carol Furtado hasbeen appointed as the Officer on Special Duty (OSD) who is leading the charge of handlingday-to-day operations of the Bank from August 26 2021.
Carol has been with Ujjivan since inception and has steer-headed the organization innumerous occasions playing vital part across different roles in her long one and a halfdecade association. We believe she is an ideal candidate and very well equipped to handlethe current covid situation with her all-round experience to handle business operationsand human resources. She has always been our go-to person during several difficultsituations such as demonetization and Andhra crisis. She will be serving the Bank asOSD' until Nitin is in office. Post September 30 Carol will take charge as theInterim CEO. In the meanwhile board will evaluate suitable candidates and submit twonames to RBI for approval on the basis of which the new MD & CEO will be appointed.This process might take 3-4 months.
We are fortunate to have on the Bank Board Mr. B.A. Prabhakar ex-CMD of Andhra Bankand Chairman of NSDL who has joined the Bank Board as an Independent Director and has beenrecommended to the RBI for his appointment as Part-Time Chairman of the Bank. Ms. SudhaSuresh has also joined the Bank Board as a Non-
Executive Director. She has been associated with Ujjivan for over 14 years and hasserved as the CFO and MD of the Holding Company during her tenure. She will addsignificant value to the Bank and will also play a pivotal role during the said reversemerger. Further Mr. Ravichandran Venkataraman has joined as an Independent Director. Heis an experienced finance operations and banking professional and has a track record of35 years and has a strong business background having worked with top business leadersacross the globe.
His multi-dimensional role covering both finance and IT will further strengthen theBank Board.
As USFB is only over four years old as a bank with the above inductions of new membersincluding myself on the Bank Board we have a blend of directors who are seasoned bankersand professionals who will bring in perspectives of other institutions of repute and helpachieve our mission to be the best digital mass market Bank. Finally the Board of themerged entity will be responsible to the integrated base of shareholders going forward.
We must look into the future with optimism and we have always believed that we willprevail against all odds.
BACKGROUND & LITTLE BIT HISTORY
It may be instructive at this time to look back briefly at our history of 16 years andsee how we got here and where we are now Ujjivan was founded by myself as a microfinancecompany (NBFC-MFI) in 2005 and its initial capital of 2.43 Crores was subscribed bymyself my friends colleagues and Bellwether
Microfinance Fund. In 10 years its grew from strength to strength attracting capitalmainly from international developmental financial institutions & private equity firmsper the permitted levels. During this period I coming from a professional bankingbackground got progressively diluted as the capital requirement rose substantially asthe business scaled up. When we received the license to convert to a Small Finance Bankone condition was that the bank had to have a promoter who should be predominantly Indianand to be eligible UFSL applied to the RBI as the promoter of the proposed bank. This ledto UFSL IPO in 2016 whereby the foreign holding was reduced below 50%. Many of yousubscribed to the IPO and have held on to the share sharing in the overall goal of thecompany as well as an investment. The operations were then spun off to the bank entityUSFB in early 2017 and UFSL became a holding company with USFB an unlisted subsidiary. Asper RBI stipulations within three years and having a capital exceeding 500 Crore UFSBitself had to be listed and there was a successful IPO in end 2019. Thereafter USFB is alisted company although a subsidiary of UFSL. USFB is also governed by the BankingRegulation Act in terms of its ownership structure number of independent directors andother aspects. USFB is also governed by SEBI regulations. In the circumstances UFSLalthough a promoter in concept is not what is generally understood as a promoter. Forexample it has only 26% voting rights (notwithstanding economic interest of 83%) half thebank directors have to be independent and only three directors can be common as betweenUFSL and USFB. All the directors and Key Management Professionals (KMPs) of UFSL arecovered by the code of conduct as regards the sharing and dealing with any potentialunpublished price sensitive information (UPSI).
However financially the two companies are intertwined: the major asset of UFSL isshares (preference shares and equity) in UFSB and UFSL depends on dividend from UFSB to inturn declare any dividend to its shareholders. UFSL has bank deposits with UFSB as well.
UFSL in itself has actually no effective promoter. The term promoter is definedvariously under enactments from the technical (signing of memorandum of associationdisclosure in prospectus or annual return) to the practical (control over the affairs ofthe company control over the board of directors binding advice shareholders agreement).
However in none of the statutes does the degree of shareholding come into play asdefining a promoter i.e. there is no minimum shareholding for a promoter to hold nor isthere any requirement to hold any share. There is a misconception in some quarters thatthe founder myself is the promoter of UFSL. This is incorrect. I am only one of thedirectors of UFSL appointed by the shareholders like the other. A director appointed in aprofessional capacity is not a promoter. On the other hand to dispel a common impressionI have a very small shareholding in UFSL. RBI regulations requires that the ManagingDirector of a bank cannot hold more than 50000 shares or 10% of any company whichever islower. Hence I had to actually dilute my shareholding in
UFSL to meet the said requirement. A significant part of the proceeds of the enforcedsale of UFSL shares was invested by me in UFSB during the Bank IPO during my service asthe MD & CEO of the Bank from February 2017 to November 2019.
LOOKING AT THE YEAR AHEAD AND POTENTIAL
The pandemic is by no means over. We can breathe easy once the vaccinations levels inIndia reaches the thresh hold levels of 70-80%.
Meanwhile we have to manage the credit crisis which hits our customers & ourstaff in waves. This means a close management of the portfolio in terms of collectionrestructuring of loans and supporting our good customers with top ups & specializedgovernment guaranteed loans. Secondly we need to provide support to our customers &their families to get vaccinated at the earliest which is the ultimate solution.
It is important in a storm to hold the crew of the ship together with all handson deck. We have unfortunately seen unprecedented high levels of attrition of staff at alllevels across the organization. This must be stopped & the employees should beencouraged and motivated to operate with full confidence.
Finally it is important for UFSL & USFB to work in collaboration to ensurethe reverse merger takes place and the shareholders' interest is duly taken care of.
We look to the future with optimism.
Samit Ghosh Chairman
August 25 2021.