Inflationary pressure to delay recovery of microfinance sector: Ujjivan Small Finance Bank MD Ittira Davis

Runaway inflation, which has clouded India’s economic growth prospects, could delay recovery in the microfinance sector, which is carrying nearly 11% of the sticky loans that have not been repaid for roughly three months, managing director Ittira Davis said.

On the sectoral level, Davis said that microfinance lenders are operating with an unsustainable level of portfolio at risk (PAR) and there is a dire need to bring it down to around 1%.

“We have to get back to the pre-Covid level when PAR was slightly below 1%. That should be the target,” Davis told ET in an exclusive interview. “Based on the business model we have, we cannot sustain a high level of PAR, but we can sustain a little higher than the pre-Covid level.”

According to data released by Microfinance Institutions Network (MFIN), the sectoral PAR over 90 days was 10.49% of total gross loan portfolio of Rs 2.85 lakh crore at the end of March 2022. Simply put, nearly Rs 30,000 crore of loans remained sticky even 90 days after the due date.

“I would say that we are moving in this direction (achieving 1% PAR). Whether it happens by the end of this financial year or early next financial year, at this stage it is difficult to say,” Davis said. “Simple because of one reason: high inflationary pressure, which has come in our way. That might delay the process a little bit.”

High Inflation reduces disposable income and capacity to repay loans.

Ujjivan’s PAR over 90 days (loans not repaid over 90 days after due date) was at 7.1% at the end of March. “We are working on bringing down the PAR. You will see the effect in our first quarter results. It has been coming down steadily,” he said.

The bank is looking to raise up to Rs 600 crore of equity in qualified institutional placement (QIP) to take care of business growth and to raise public shareholding to 25% as per market guidelines. The deadline for raising this is December 31, 2022. After raising the QIP, the bank would seek Reserve Bank of India’s approval for the proposed reverse merger of its holding company, , with itself.

Ujjivan is also looking to raise tier-2 capital to create a balance in its capital structure. Davis said the bank at present hardly has any tier-2 capital. “We are looking at raising Rs 500 crore through tier-2 in the first tranche. We are looking at longer term tier-2, for six seven years. So, whether we raise it six months before or six months later, it makes a marginal difference in terms of costing,” Davis said.

The bank is also planning to introduce gold loans in the next quarter. “Many of our customers, especially the micro-banking customers, are asking for it. We have already started two-wheeler loans and the portfolio is slowly building up,” the MD said.

Davis said the bank has had “two good quarters – third and fourth quarter of last financial year”.

“We would like to make sure that those things we did right in those two quarters we continue to do. Specifically, we would like to keep attrition down because manpower and good people make all the difference. And right now, the most important thing is to ensure that we do the collections right. Another crucial issue is to grow our deposit base,” Davis said.