SFBs will continue to see elevated credit costs in FY22: ICRA

ICRA said the overall risk profile of SFBs’ portfolio remains high due to higher proportion of unsecured loans despite such lenders entering retail asset classes such as vehicle loans, business loans, loan against property  and housing finance over the last few years. 

However, the reported GNPA as on March end is expected to be higher by 70-80 basis points compared to the level as on March 31, 2021.
However, the reported GNPA as on March end is expected to be higher by 70-80 basis points compared to the level as on March 31, 2021.

Small Finance Banks (SFB), which witnessed a decline in collections and subsequent weakening of the asset quality during second wave of Covid-19, will continue seeing elevated credit costs in the current fiscal (2021-22), leading to subdued profitability, domestic rating agency ICRA said in a report on Monday.ICRA said the overall risk profile of SFBs’ portfolio remains high due to higher proportion of unsecured loans despite such lenders entering retail asset classes such as vehicle loans, business loans, loan against property  and housing finance over the last few years. 

According to ICRA’s estimate, SFBs’ asset quality deteriorated, with reported gross non-performing assets (GNPAs) being 6.4% at the end of September,  higher than 5% at the end of March.The gradual ramp-up in the collection efficiency of SFBs provides comfort, however, performance of the restructured portfolio remains monitorable, the rating agency said. On an overall basis, ICRA expects some reduction in GNPAs in H2FY22 (October-March). However, the reported GNPA as on March end is expected to be higher by 70-80 basis points compared to the level as on March 31, 2021.

On the growth rate, ICRA said SFBs’ assets under management (AUM) are expected to register a marginal improvement to around 20% in the current financial year, compared to the growth rate of 18% witnessed in previous one. The rating agency maintains its cautious stance as the recent surge in Covid-19 infections could play a spoilsport and impact the recovery in growth.“With the second wave of the pandemic impacting disbursements in Q1FY2022 (April-June), the AUM growth rate declined in H1FY2022.

The industry is estimated to have reported an annualised growth rate of 7-8% in H1FY22. Nevertheless, since disbursements have started picking up, we expect the pace of growth to improve in H2FY22, 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,” said Sachin Sachdeva, vice president and sector head of financial sector ratings at ICRA.  

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