India’s micro finance landscape, hit hard by the pandemic, is yet to heal completely. In fact, if latest data from credit bureaus are to be believed, stress has only increased for lenders in this space. In this context, Suryoday Small Finance Bank Ltd’s initial public offer (IPO) comes at a time when investors have low short-term visibility over asset quality.
This is one of the red flags that investors would worry while looking at the IPO through which the lender may garner close to ₹250 crore at the upper end of the price band of ₹303-305 per share.
The lender’s proforma bad loans in December quarter at 9.3% were the highest among peers. Proforma bad loans capture the true picture of asset quality as they adjust for the judicial standstill on asset recognition. What’s more is that Suryoday’s operations are concentrated in Maharashtra, Tamil Nadu and Orissa although the lender has diversified its presence in other states. Resurgence in new infections in Maharashtra has resulted in select districts going into temporary lockdowns and this could impact collections for the lender. But the management seems confident of tiding over this challenge. “There is a temporary challenge in collections but they are going to improve going forward. Our strength is the community based lending we do and our customers try their best to repay," said Baskar Babu Ramachandran, managing director of the lender.
More than 80% of Suryoday’s borrowers are women, a cohort generally attributed with better repayment discipline. Nevertheless, the employment loss among women has been higher than men in the wake of the pandemic.
Given that asset quality doesn’t match up to peers, investors have little incentive to prefer Suryoday over other larger players such as Ujjivan Small Finance Bank Ltd and Equitas Small Finance Bank Ltd. That leaves the growth prospects and here Suryoday has several positives to offer. The bank’s gross loan portfolio has grown at a compounded annual growth rate of 46.98% in the three years to FY20. An additional positive is that non-micro finance loan book has grown exponentially, helping the lender in reducing its dependence on it. Although the microfinance portfolio is still over 70% of the loan book, the management is focussed on secured lending such as affordable housing, commercial vehicles and others. Ramachandran said that the non-micro finance portfolio would continue to grow faster than the microfinance part in the coming quarters too.
Loan growth has been a casualty for most banks in the aftermath of the pandemic. Small finance banks including Suryoday have focussed more on collections rather than growing their loan book. At a valuation multiple of two times its book value which is similar to larger peers, Suryoday Small Finance Bank doesn’t offer enough reasons for a listing pop. Growth prospects, however, could lend some conviction to investors.
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