How small finance banks are likely to perform this fiscal year as Covid-19 hits business

The growth in assets under management (AUM) of small finance banks (SFBs) during fiscal 2021-22 will only see a marginal increase owing to a tough operating environment arising from Covid-19 induced challenges, especially the second wave in the first quarter of fiscal 2022, as per ICRA Ltd.

The research and credit rating firm said the second wave of Covid-19 infections impacted business sentiments in the first quarter of FY22. Nevertheless, growth is expected to pick up in the rest of the financial year and ICRA estimates a growth of 20% in the AUM of SFBs in FY22.

India has nine small finance banks. These are Ujjivan SFB, Jana SFB, Equitas SFB, AU SFB, Capital SFB, ESAF, Utkarsh, Suryoday and Fincare SFB.

However, asset quality pressures coupled with higher restructuring vis-à-vis last year are likely to keep credit costs high in FY22. ICRA maintained its ‘negative’ outlook on the sector and said capital, liquidity support, and collection trends remain key monitorable aspects. Here’s what it has to say.

Growth could pick up

With the second wave of the pandemic impacting disbursements in the first quarter of fiscal 2022, the AUM growth rate declined in the first half fiscal 2022. The industry is estimated to have reported an annualised growth rate of 7-8% between April and September.

Nevertheless, since disbursements have started picking up, the rating agency expects growth to revive in the second half of fiscal 2022, pushing the full-year AUM growth to around 20%. 

Delinquencies to remain elevated

With stricter lockdowns across various states in the first quarter (April-June 2021), the collections for SFBs were negatively impacted. Further, unlike the moratorium and restrictions on bucket movement, which were available in Q1FY21, there were no such dispensations this time.

Hence, SFBs witnessed weakening of asset quality with reported gross non-performing assets (GNPAs) of 6.4% at the end of September 2021 (5.0% as on March 31, 2021).

ICRA expects additional slippages from both the standard and the restructured portfolio in H2FY22. However, the gradual ramp-up in the collection efficiency (CE) of SFBs provides comfort.

On an overall basis, ICRA expects a reduction of 50-60 basis points (bps) in GNPAs by the end of March 2022 compared to the level as of September 2021. However, the reported GNPA% as on March 2022 is expected to be higher by 80-90 bps compared to the level as on March 2021.

Liquidity to remain comfortable

SFBs have been able to maintain a favourable asset-liability maturity profile supported by a shorter-tenor asset mix, high share of non-callable deposits as well as long-term funding support from financial institutions like National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI) and Micro Units Development & Refinance Agency Ltd (MUDRA).

ICRA expects SFBs to maintain healthy liquidity, especially given the uncertainty in the industry. Further, their access to the call/notice/term money market supports their liquidity. 

Profitability to dip marginally

Given the likelihood of elevated credit costs, the return on managed assets is likely to remain moderate at 0.8-0.9% in FY22 compared to 1.3% in FY21, despite the improved scale of operations.

Over the long term, the ability to improve the operating efficiency further and control the credit costs would be imperative for improving the return indicators.