Bad loan woes begin to bite at Ujjivan Bank
PremiumThe bank did not restructure any loans in the March quarter, but has recast loans worth ₹852 crore
On the face of it, Ujjivan Small Finance Bank Ltd’s March quarter performance had several pleasing metrics. The lender’s net profit surged 86% on the back of earlier provisions written back into profits and an increase in non-interest income. Its disbursements were the highest ever in March, growing a robust 31% for the quarter.
In the recovery path for banks, Ujjivan will win prizes. After all, the small finance bank suffered in the beginning of FY21 as lockdowns imposed to prevent the spread of coronavirus resulted in borrowers defaulting on their repayments and prospective customers postponing plans to borrow.
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2 min read . 11:52 AM ISTAnother comfort for the lender was its steady growth in deposits. For the March quarter, deposits expanded 22% year-on-year, driven by retail deposits.
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However, this is where the good news ends. There are enough troubling signs for investors from the March quarter performance that may shake their confidence on the outlook amid the covid-19 pandemic’s second wave.
The bank’s bad loans rose to 7.1% of the total book from as low as 4.8% in the previous quarter. As the lender could not call defaulted loans as bad in the previous two quarters because of a judicial standstill on bad loan recognition, all bad loans were bunched up to be identified in the March quarter. Even so, the extent of increase in bad loans should worry investors.
Further, the lender’s restructured loan pile at 6.8% of its loans is one of the highest in the industry. The bank did not restructure any loans in the March quarter, but has recast loans worth a total of ₹852 crore.
What’s more is that while stress has increased, the bank’s provision coverage ratio has not.
“With PCR at 60%, covid buffer at 1% of loan book and severity of the second wave of pandemic on economic activity, we expect credit costs in FY22 to remain elevated and increase our average provisions estimates for FY22-FY23E to 3.2% from 2.7%," analysts at HDFC Securities Ltd wrote in a note.
The bank’s shares have been under pressure since April, a reflection of the worries over asset quality. It needs to be able to contain stress and build provisioning to a level that gives more confidence to investors.
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