SFBs expected to register marginal improvement in AUM growth rate in FY22: ICRA

The assets under management (AUM) of small finance banks (SFBs) are expected to register a marginal improvement in growth rate to around 20 per cent in FY2022 as compared to 18 per cent growth rate witnessed in FY2021, according to Investment Information and Credit Rating Agency (ICRA).

However, the SFBs’ AUM growth in FY2022 would be lower compared to the compound annual growth rate (CAGR) of around 30 per cent during FY2016-FY2020.

The credit rating agency said it maintains its cautious stance as the recent surge in Covid-19 infections could play spoilsport and impact recovery in growth.

“The challenge posed by the second Covid wave led to a deterioration in the asset quality metrics in H1 (April-September) FY2022; nevertheless, some recovery is expected by the end of FY2022. Although 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,” ICRA said.

Overall, the credit rating agency expects some reduction in the Gross Non-Performing Assets (GNPAs) as a percentage of gross advances in H2 (October-March) FY2022.

However, the reported GNPA as a percentage of gross advances as on March 31, 2022 is expected to be higher by 70-80 basis points compared to the level of 5 per cent as on March 31, 2021.

Unsecured loans pose risk

Further, the overall risk profile of SFBs’ portfolio remains high given the higher proportion of unsecured loans despite their foray into retail asset classes such as vehicle loans, business loans, loan against property (LAP) and housing finance over the last few years.

Sachin Sachdeva, Vice President and Sector Head, Financial Sector Ratings, ICRA, observed that with the second wave of the pandemic impacting disbursements in Q1 (April-June) FY2022, the AUM growth rate declined in H1 FY2022.

“The industry is estimated to have reported an annualised growth rate of 7-8 per cent in H1 FY2022. Nevertheless, since disbursements have started picking up, we expect the pace of growth to improve in H2 (October-March) FY2022, pushing the full-year AUM growth to around 20 per cent. However, that would be subject to no major impact from the recent rise in Covid infections,” he said.

Ramp up in collection

ICRA noted that 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 per cent as on September 30, 2021 (5 per cent 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,” the agency said.

Referring to SFBs witnessing a reduction in their net interest margins in FY2021, Sachdeva said given the challenging operating environment and interest income reversal on delinquent accounts, their operating profitability was supported by the reduction in the operating expenses ratio.

High credit cost

Nevertheless, the elevated credit cost impacted the return indicators in FY2021. Credit costs are expected to remain elevated in FY2022 as well, which will keep the profitability subdued.

Sachdeva underscored that over the long term, SFBs’ ability to improve the operating efficiency further and control credit costs would be imperative for improving the return.

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.

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