Small finance banks are no longer being questioned for their business model or viability. They have survived two major crises — demonetisation and the pandemic. FY23 turned out to be a year of unprecedented profits and the trend continues. SFBs have established that it is a model that is here to stay. That box has been ticked and they have moved much beyond. What will be tested from here on is whether investors will get a good exit.

SFBs are among the few financial services segments intensely dominated by private equity investors. Big names, such as TPG, TrueNorth, Arpwood, Gaja Capital, and Aavishkaar, hold chunky positions. They took a bet on the sector when licences opened in 2014. Money came in at significant premium, in some cases even at 3.5–4x price to book. It reflected the enthusiasm investors had on the NBFCs-to-banks conversion theme. Some of the initial exits that happened in the SFB space returned 3–4x gains over. Even until 2019, returns were computed on ‘number of times’ and not on percentages.

But the Utkarsh IPO revealed that the party is over. One could say that post listing there has been a massive rerating not just for the bank, but for the entire SFB segment. But that still doesn’t take away the fact that’s if the IPO garnered a tremendous response, credit should be given to its pricing, which was just around its book value. Jana SFB’s pre-IPO round of funding mirrors a similar valuation, and was at a significant discount to it past asking rates.

Be it the Utkarsh IPO or Jana’s fund-raise, there are two interesting takeaways – it might be difficult for the promoters to seek a good exit through the IPO; they may have to take the post-IPO capital market route to exit, and the IPO’s success pricing holds key. Clearly, the days of high alpha returns are behind them. The best case return scenario for the sector has dipped to 14–17 per cent since FY19. Ironically, this is despite the sector withstanding questions around its business model and relevance.

Will there really be space for all? Listing may not be an issue for SFBs — neither do they have the choice to remain unlisted for longer. But life after listing may not be easy. Not only will there be an overhang of supply of their own stocks, but also of the sector. Who among the nine microfinance companies that became banks can best withstand this problem of plenty will reveal the survivors.