Industry to report losses at a consolidated level
The growth in assets under management (AUM) of domestic small finance banks (SFBs) is projected to more than halve to 10-15% for FY2021 as compared to growth of 30% in FY2020, according to a report by ICRA Ltd.
The industry is expected to report losses at a consolidated level in FY2021 driven by high operating costs and elevated credit costs of around 3.5%-4%, said the report on 14 Sept 2020.
Further, SFBs may require equity infusion of around Rs. 5,000-6,000 crore for the industry to achieve a CAGR of 15-20% till FY2023 and to absorb expected losses and maintain gearing levels at 7.0-8.0 times.
Giving further insights, Supreeta Nijjar, Vice President and Sector Head, Financial Sector Ratings, ICRA, said, “SFBs would need external capital not only to manage COVID 19 related credit costs and medium-term growth but also to manage the regulations related to reducing promoter shareholding below 40%.
“At present, 8 out of 10 SFBs are yet to comply with the requirement of bringing down promoter shareholding to 40% within 5 years of commencement of banking operations.
“Additionally, SFBs are required to list themselves on the stock exchanges within 3 years of reaching a net worth of Rs.500 crore and some SFBs are approaching the three-year timeline in FY2021,” said Nijjar.
Commenting on the current trends, the report highlights the steady improvement witnessed by SFBs in their collection efficiency to around 69% in July 2020 from 24% in April 2020. The easing of the lockdown restrictions enabled SFBs to resume field activities, re-establish their connect with borrowers and convince the majority of them to start paying their installments.
Some SFBs even started making disbursements to existing customers from June 2020 onwards. This brings much-needed relief to the pandemic-hit industry.
Nevertheless, the SFBs’ ability to sustain this trend and improve collections further would be critical for containing the losses.
Sachin Sachdeva, Vice President, Financial Sector Ratings, ICRA, said, “As on July 31, 2020 portfolio which continued to be in moratorium varied across SFBs from 11% to 47% (borrowers who haven’t paid a single installment in April-July 2020) with the median number being around 25%. While the number has been coming down over the months, in ICRA’s opinion SFBs ability to regularize this balanced portfolio will be critical to minimize credit losses going forward.”
On the FY2020 performance, the total asset base of SFBs crossed Rs. 1,30,000 crore as on March 31, 2020 and AUM crossed Rs. 90,000 crore with a growth of 30% in FY2020 (41% growth in FY2019), given continued healthy traction on resource mobilisation. Despite the foray into retail asset classes such as vehicle loans, business loans, loan against property (LAP) and housing finance over the last two years, the perceived risk profile remains relatively elevated given the higher proportion of unsecured loans.
Further, since eight of the 10 SFB licensees were originally microfinance institutions (MFIs), microfinance dominates the asset mix of these SFBs.
Nevertheless, the asset quality indicators of SFBs improved with gross NPA at 1.7% as on March 31, 2020 (2.4% as on March 31, 2019), supported by growth in portfolio and the write-off of legacy demonetisation-related slippages.
SFBs have made good progress on deposit mobilisation with 70% of their borrowings, as on March 31, 2020, being through deposits. While deposit growth and stability have been good, SFBs still need to build low-cost deposit base as the large portion of deposits comprises bulk deposits and the share of CASA deposits remained low at 16% as on March 31, 2020.
Further, their interim funding requirements have been met from funding from refinancing institutions like SIDBI, NABARD and MUDRA, which accounted for 24% of their borrowings as on 31 March 2020.
This also led to a favourable asset-liability maturity profile with shorter-tenor assets, high share of non-callable deposits and rise in long term funding from refinancing institutions. Further, like other scheduled commercial banks (SCBs), SFBs are eligible for additional liquidity support including interbank limits and have access to the call money market as well.
Nijjar added, “While bulk deposits and funding from refinancing institutions support the near-term liquidity position, SFB’s ability to develop a strong franchise and hence, a stable retail deposit base, is critical from a long-term perspective.”
Owing to the focus of the SFBs on higher-yielding asset classes, portfolio yields and NIMs continue to be higher for SFBs than that of SCBs. With an improvement in lending yields owing to the improved asset quality and hence lower interest reversals on delinquent portfolios, SFBs witnessed further improvement in yield on advances and NIM in FY2020.
The setting up and up-gradation of existing branches, systems up-gradation, and the hiring of manpower have kept the operating expense ratios high.
However, the overall profitability of SFBs improved, supported by higher NIMs and lower credit costs, with RoE increased to 14% in FY2020 from -8% in FY2019. #economy #finance #banks #debts #assets /fiinews.com
