The assets under management (AUM) of the small finance banks (SFBs) are expected to register a marginal improvement in the growth rate to around 20% in FY2022 compared to the growth rate of 18% witnessed in FY2021, though the same would be lower compared to the compound annual growth rate (CAGR) of around 30% during FY2016-FY2020. Nevertheless, ICRA maintains its cautious stance as the recent surge in Covid-19 infections could play a spoilsport and impact the recovery in growth. The challenge posed by the second wave of the Covid-19 pandemic led to a deterioration in the asset quality metrics in H1 FY2022; nevertheless, some recovery is expected by the end of FY2022. Though the portfolio growth is expected to drive an improvement in revenue, the expected elevated credit costs are likely to keep the profitability subdued in FY2022.
Giving further insights, Mr. Sachin Sachdeva, Vice President and Sector Head, Financial Sector Ratings, ICRA, says, “With the second wave of the pandemic impacting disbursements in Q1 FY2022, the AUM growth rate declined in H1 FY2022. The industry is estimated to have reported an annualised growth rate of 7-8% in H1 FY2022. Nevertheless, since disbursements have started picking up, we expect the pace of growth to improve in H2 FY2022, pushing the full-year AUM growth to around 20%, though the same would be subject to no major impact from the recent rise in Covid-19 infections.”
Amid the second wave of the pandemic, SFBs witnessed decline in collections and hence weakening of asset quality metrics with reported gross non-performing assets (GNPAs) of 6.4% as on September 30, 2021 (5.0% as on March 31, 2021). The gradual ramp-up in the collection efficiency of SFBs provides comfort, however, performance of the restructured portfolio remains monitorable. On an overall basis, ICRA expects some reduction in GNPA% in H2 FY2022, however, the reported GNPA% as on March 31, 2022 is expected to be higher by 70-80 bps compared to the level as on March 31, 2021. Further, the overall risk profile of SFBs’ portfolio remains high given the higher proportion of unsecured loans despite SFBs’ foray into retail asset classes such as vehicle loans, business loans, loan against property (LAP) and housing finance over the last few years.
On the liquidity front, 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 (FIs) 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.
Adds Mr. Sachdeva, “SFBs witnessed a reduction in its net interest margins in FY2021, given the challenging operating environment and interest income reversal on delinquent accounts, its operating profitability was supported by the reduction in the operating expenses ratio. Nevertheless, the elevated credit cost impacted the return indicators in FY2021. Credit costs are expected to remain elevated in FY2022 as well, which would keep the profitability subdued. Over the long term, SFBs’ ability to improve the operating efficiency further and control the credit costs would be imperative for improving the return.”