Small banks brace for impact of 2nd covid wave on asset quality
PremiumSmall finance banks (SFBs) in India are expected to face broad delinquencies across loan portfolios amid the turmoil caused by the second wave of the pandemic, analysts said
MUMBAI : Small finance banks (SFBs) in India are expected to face broad delinquencies across loan portfolios amid the turmoil caused by the second wave of the pandemic, analysts said.
Such banks are mandated by the Reserve Bank of India (RBI) to promote financial inclusion by serving the unbanked sections such as small businesses, small and marginal farmers, and micro and small industries and unorganized entities, which are one of the worst-affected segments. Several SFBs also did aggressive lending in the past two quarters, analysts said.
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The provision coverage ratio (PCR) of three listed banks—Equitas Small Finance Bank Ltd, Ujjivan Small Finance Bank Ltd and AU Small Finance Bank Ltd—stood at less than 60% of total bad assets at the end of March quarter, showed earnings data of the lenders. While this is considered decent in a normal quarter, none of the SFBs created any substantial buffer against the impact of the second wave.
AU Small Finance Bank set aside a small contingent provision of ₹70 crore at the end of the March quarter. The bank’s provision coverage ratio fell to 50% at the end of the quarter from 53% a year earlier. Equitas Small Finance Bank, the most conservative among the SFBs, saw a 25% decline in overall provision, compared with last year. The bank made an additional provision of only ₹153 crore at the end of the March quarter.
Ujjivan Small Finance Bank, which saw the sharpest rise in non-performing assets as a percentage of total assets to 7%, saw a reversal in provision owing to better recoveries. The bank, too, did not create any additional provision, barring the outstanding covid-related provision of ₹170 crore as of March end. The bank’s provision coverage ratio also fell to 60% in the fourth quarter from 80% a year ago.
According to the Ujjivan’s management, the bank is waiting for more clarity on the lifting of lockdowns in several states. The bank’s collection efficiency declined sharply between April and May.
“Collection efficiency has dropped by 5-6% between March and April. May collections may be even lower than April. We have also seen a contraction in demand for credit during this period. We do hope that it improves. We are carrying ₹175 crore of unused provisions. Towards the end of the quarter, we will see how much provisions we need to keep," said Nitin Chugh, managing director and chief executive officer, Ujjivan Small Finance Bank.
Despite the rise in defaults, these SFBs saw a sharp jump in loan disbursements in the second half of the fiscal ended 31 March. Among the SFBs, AU Small Finance Bank saw a 48% growth in disbursements from a year earlier at the end of the March quarter, followed by Ujjivan SFB at 30% and Equitas SFB at 5%.
Analysts said their near-term focus would remain on asset quality and impact of the second wave on the balance sheets of these banks.
“AU’s strong asset growth was marred by poor asset quality, with a 100bps q/q increase in GNPAs. The extent of the increase in GNPAs was a negative surprise; while well provided for, we are concerned about the aggressive disbursals done in the past two quarters (36% of March 2021 AUM), which remain unseasoned entering into the second wave of covid. Further, we think AU will have to slow down its growth, given the uncertain environment, and will need to demonstrate stable asset quality before the current rich valuations can be justified. We are less worried about the long-term story," said Nomura in a report on 1 May.
Unlike last year, the asset quality of SFBs can be a greater cause for worry as RBI has not announced a repayment moratorium this year.
The regulator has only permitted restructuring of small business and retail loans, which many banks are finding difficult to offer during the ongoing lockdowns. In the first covid-19 wave last year, many SFBs tapped the moratorium provisions widely.
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