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Small finance banks to see 20% AUM growth in FY22, profit to be subdued: ICRA

Small finance banks to see 20% AUM growth in FY22, profit to be subdued: ICRA

ICRA said that the overall risk profile of SFBs' portfolio remains high given the higher proportion of unsecured loans despite their foray into retail asset classes.

The gradual ramp-up in the collection efficiency of SFBs provides comfort, ICRA said. The gradual ramp-up in the collection efficiency of SFBs provides comfort, ICRA said.

The small finance banks (SFBs) are likely to register a marginal improvement in the growth rate of their assets under management (AUM) in financial year 2021-22 (FY22) to 20 per cent from 18 per cent growth witnessed in FY21, ratings agency ICRA said.
 
However, this growth rate will still be lower than the compound annual growth rate (CAGR) of around 30 per cent during FY16-FY20.
 
"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," the ratings agency said in a release.
 
Amid the second wave of the pandemic, SFBs had witnessed a decline in collections which resulted in them reporting gross non-performing assets (GNPAs) of 6.4 per cent as on September 30, 2021 as against 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, ICRA said.
 
"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 per cent 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 per cent, though the same would be subject to no major impact from the recent rise in Covid-19 infections," ICRA Vice President and Sector Head, Financial Sector Ratings Sachin Sachdeva said.
 
The ratings agency expects some reduction in GNPAs of SFBs in the second half of FY22, however, the reported GNPA as percentage of total loans as on March 31, 2022 is expected to be higher by 70-80 basis points as compared to the level as on March 31, 2021, it said.
 
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ICRA said that 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 and housing finance over the last few years.
 
On liquidity front, it said 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 NABARD, SIDBI and MUDRA.
 
It 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. 
 
SFBs also witnessed a reduction in net interest margins in FY2021, given the challenging operating environment and interest income reversal on delinquent accounts. While their operating profitability was supported by the reduction in the operating expenses ratio, ICRA expects profitability to remain subdued in FY2022.
 
"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," Sachdeva said.

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