Aided by improving operating leverage and efficiencies, Fedbank Financial Services (FedFina) is focussing on improving its cost-to-income ratio, which in turn should boost profitability over a period of time, according to MD and CEO Anil Kothuri.

“We are looking to drive operating leverage in our business, which means that the large number of branches we have opened will keep adding AUM,” Kothuri told businessline.

“The AUM per branch will increase with each passing quarter, so our revenues will increase but our costs will not increase in the same proportion. Therefore, our business is biased to be more profitable on a quarter-by-quarter basis.”

The NBFC’s cost-to-income ratio has been elevated by around 57-58 per cent for the last three years due to heavy branch expansion. The number of branches stood at 584, up five-fold in five years from 120 branches in 2018. It posted a net profit of Rs 180 crore for FY23 and ₹54 crore for Q1 FY24.

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FY24 is the first year that the NBFC has not opened any gold loan branches, given that the focus is now on AUM per branch. However, the company has added some small mortgage branches, the number of which is expected to go up to 178 by the end of the financial year.

“The proportion of newer branches is coming down, which is why our RoEs are going up,” he said, adding that the RoE (return on equity) was 15.6 per cent as of June 2023.

Initial public offer

Federal Bank promoted FedFina had refiled its IPO papers in July 2023 after the first approval lapsed in May 2023. The ongoing ₹1,092-crore IPO includes a fresh issue of shares up to ₹601 crore and an offer-for-sale of up to ₹492 crore.

“We need to raise money because we need to augment our capital position, and this is fuel to leverage and grow for the future. We‘ve done about 100 road shows, met investors, and have demand. The anchor book is reasonably stitched up, so we’re in a good place now,” Kothuri said.

FedFina raised ₹324.67 crore from 22 anchor investors by allotting 2.3 crore shares at the upper price band of ₹140 per share. Key investors include HDFC Mutual Fund, HDFC Life Insurance, SBI Life Insurance, Nippon Life India, Kotak Mahindra Life Insurance, Tata AIA Life Insurance, Bajaj Allianz Life Insurance, Societe Generale, and Goldman Sachs (Singapore) PTE.

In addition, Federal Bank and True North Fund VI LLP transferred 2.35 crore shares of FedFina to investors such as SBI Life Insurance, Star Union Life, Yasya Investments, and Nuvama as part of a pre-IPO secondary share sale. Post-IPO, Federal Bank will hold about a 61 per cent stake and True North will hold an 8 per cent share in the NBFC.

Loan portfolio

The retail lending company offers three products: gold, mortgages, and unsecured loans, all of which are seeing strong growth, Kothuri said.

“We cater to an extremely attractive (self-employed) market; we have all the resources to grow, including distribution, people, and access to borrowings. We will take advantage of this and grow at a reasonably good rate.”

The gold loan market, which saw increased competition during the pandemic, has now relatively calmed down, he said, adding that the future of this sector looks to be one of co-operation between banks and NBFCs.

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“For banks, it’s a zero-risk weight business and NBFCs have the distribution and the ability to manage the fraud risk. I think NBFCs will become more capital-light and more co-lending models will come up,” he said, adding that FedFina too has tied up with three banks for co-lending.

On the unsecured side, the NBFC has a monthly disbursal rate of about ₹120 crore, which it lends entirely to small businesses and self-employed borrowers. Kothuri said that the company is not looking at salaried customers or unsecured individual loans at the moment as existing products are “good to scale multifold from here on”.

“Because of our low cost of funds, we are able to attract a better segment of customers and price it better for the same spread. Therefore, our cost of credit will be lower, and that’s a virtuous cycle that will propagate itself,” he said.