Category: Banking & Finance

The board of Ujjivan Small Finance Bank is scheduled to meet on August 25 to appoint an Officer on Special Duty (OSD) after its Managing Director and CEO Nitin Chugh tendered his resignation.

“The bank is going through a rough time due to the Covid-19 pandemic, just like all other small finance banks and micro finance institutions. Financially, the bank remains very strong and is well capitalised,” said Samit Ghosh, founder, Ujjivan Financial Services. Expressing surprise over Chugh’s decision to resign, Ghosh said that it was for personal reasons.

‘Nothing unusual’

“There is nothing unusual going on with the bank,” he stressed.

However, there have been concerns over provisions and asset quality as well as the spate of resignations at the management level and field offices.

The meeting on August 25 will also induct four new members on the board. The appointment of a new MD and CEO is expected to take about three to four months.

Ujjivan SFB, in a statement, said the transition post Chugh’s resignation is being smoothly managed, in consultation with the Reserve Bank of India.

“The bank has been working for several months to strengthen the board,” it said in a statement.

Noting that the bank has recently witnessed several challenges on the business front, coupled with several resignations both at the board level and senior management, Ujjivan SFB further said: “The immediate task of bank board in close collaboration with the holding company would be to bring back stability and achieve its desired goals and growth, complete the reverse merger and see that shareholders’ interest is duly taken care of.”

Ujjivan SFB’s scrip closed 18.76 per cent down at ₹19.7 apiece on the BSE on Friday.

In a stock exchange filing on August 19, Ujjivan SFB had said Chugh has tendered his resignation as MD and CEO citing personal reasons. He will step down from the role on September 30.

The lender has seen a number of board-level resignations in recent months. Its Chief Financial Officer also tendered her resignation on July 7, which is effective from September 30.

Registers net loss

The bank had reported a standalone net loss of ₹233.48 crore in the quarter ended June 30, 2021, with gross non-performing assets rising to 9.79 per cent of gross advances.

BA Prabhakar, former CMD of Andhra Bank, and Chairman of NSDL, has joined the Ujjivan SFB’s board as an Independent Director and is being considered as Part-Time Chairman of the bank.

The board of Ujjivan Financial Services has nominated Samit Ghosh, the founder of Ujjivan, as a common (non-executive, non-independent) director on the bank board to provide oversight on some critical areas such as portfolio quality and people management.

The Finance Ministry has made changes to the Foreign Exchange Management Act (FEMA) regulations to ensure that private banks having joint venture or subsidiary in the insurance sector do not breach the 74 per cent cap on FDI.

Investment limit

Earlier this year, the government enacted a legislation to allow foreign investment limit to 74 from 49 per cent, along with foreign ownership and control with safeguards. Similarly, private banks have foreign investment limit of 74 per cent, but with a condition that no shareholder, irrespective of the shareholding, will have more than 15 per cent of the total voting right.

A notification issued by the Economic Affairs Department of the Finance Ministry said that the application for FDI in private banks having joint venture or subsidiary in insurance sector may be addressed to the RBI for consideration, in consultation with the Insurance Regulatory and Development Authority of India (IRDAI). This needs to be done to ensure that foreign investment limit in insurance is not breached.

Conditions attached

The notification also provided for maintaining conditions attached with foreign investment in insurance sector. One such conditions was that for a bank to act as an insurance intermediary, the foreign equity investment caps applicable in that sector would continue to apply. The said entity will also have to see that revenue from the primary business must remain above 50 per cent of their total revenues in any financial year.

Officials say there could be a situation where the private bank is controlled by Indian residents and its insurance business by a foreign company. As on date, many of the private sector banks have tie-ups with foreign entities for insurance business – ICICI Bank has a tie up with Prudential while PNB has partnered with Metlife.

The RBI guidelines do not permit banks to undertake insurance business with risk participation departmentally; they can do so only through a subsidiary or joint venture set up for the purpose.

Now, if a bank plans to set up such a subsidiary to undertake insurance business with risk participation, it will have to fulfil certain conditions – the net worth of the bank should not be less than ₹1,000 crore, Capital Adequacy Ratio should not be less than 10 per cent, NPA should not be more than 3 per cent, and should have been profitable for the last three consecutive years.

“It should also be ensured that risks involved in the insurance business do not get transferred to the bank, and that the banking business does not get contaminated by risks that may arise from the insurance business. There should be an ‘arm’s length’ relationship between the bank and the insurance outfit,” according to RBI norms.

Banks can also set up a subsidiary or JV for insurance broking or corporate agency. Here, the criteria would be different. These include net worth not less than ₹500 crore, Capital Adequacy Ratio of 10 per cent or more, NPA should not be more than 3 per cent, and the bank should have made a net profit for the last three continuous years.