Lenders To India's Most Vulnerable Borrowers Signal Stability At Bottom Of The Pyramid
Small finance banks are seeing a recovery in asset quality but pain lingers.
Small finance banks, which lend primarily to small businesses and vulnerable lower income borrowers, are starting to see defaults ease -- a signal that stability is returning to those worst impacted by the economic fallout of the Covid-19 pandemic.
After a period of rising bad loans, the three largest small finance banks have reported a decline in gross non-performing assets in the March quarter. While bad loans still remain elevated, these lenders are seeing improved recoveries and are pushing up lending as conditions stabilise.
AU Small Finance Bank saw its gross NPA ratio drop to 2% from 2.6% a quarter before.
Equitas Small Finance Bank saw the gross NPA ratio drop to 4.1% from 4.6%.
Ujjivan Small Finance Bank, which has the highest bad loans, also saw some improvement in gross bad loans, which fell to 7.34% of advances from 9.8% a quarter ago.
Suryoday Small Finance Bank was an outlier and saw bad loans rise to 11.8% from 10.48%.
"Asset quality is reaching pre-Covid levels," said Uttam Tibrewal, executive director at AU Small Finance Bank, in an analyst call after the quarterly earnings. He pointed to the fact that, a year ago, the gross NPA ratio was more than double the current level.
PN Vasudevan, chief executive of Equitas Small Finance Bank, shared that view. "Overall asset quality has improved over the last two quarters," he told analysts.
NPA collections have been rising, Ittira Davis, chief executive officer of Ujjivan, told analysts. "What is most heartening is the reduction in incremental overdues, which have almost come back to the pre-Covid level."
A Tough Road To Recovery
While lenders are speaking of an improvement in asset quality, the path has been difficult. Most lenders have had to write-off a significant amount of loans gone bad and may continue to see elevated additions to bad loans from the pool of restructured loans.
Equitas has written-off Rs 144 crore in loans during the quarter using existing provisions.
Ujjivan has written-off Rs 275 crore in principle of outstanding loans.
AU Small Finance Bank wrote off Rs 23 crore during the fourth quarter.
The decline in bad loans is a combination of write-offs and recoveries, said Ashutosh Mishra, head of research-institutional equities at Ashika Stock Broking. Mishra, however, said there are clear signs of a turnaround. These lenders will take some time to fully turn around but they are on the path to recovery.
Anand Dama, senior research analyst at Emkay Global Financial, said small finance banks have seen good improvement in collections as the pandemic eased. “Meaningful recovery will take time. Collections from borrowers classified as standard are good; the challenge lies in non-standard borrowers," he said. The lenders have, however, had to write-off loans to clean up their books.
These lenders still face troubles in dealing with the pool of restructured loans. In some cases, this is leading to higher slippages, or fresh bad loans.
Equitas Small Finance Bank saw slippages of Rs 410 crore during the quarter or 9.7% of loans.
Ujjivan saw slippages of Rs 220 during the quarter or 6% of loans.
AU Small Finance Bank saw slippages of Rs 200 crore, 0.5% of opening loans non-annualised, according to a Nirmal Bang report.
"There are some challenges in the asset-quality side but the sector looks more stable compared to the past," said Sanjay Kumar Agarwal, senior director at CARE Ratings.
Is Lending Picking Up?
As the environment stablises, small finance banks are also increasing the pace of lending.
Fourth-quarter disbursements have been the highest ever on a quarterly basis in Ujjivan's history, said Davis. "This has led by secular growth across all verticals, although micro-banking continues to lead, but other verticals have also defended their share in the overall portfolio."
"We used to grow at about 30-35%," said Rohit Phadke, head of retail assets at Equitas, on the company's fourth-quarter earnings call. "With all the sales people being deployed back into sales and market looking up, we are quite geared to do a growth of 30-35% this year."
"We are quite hopeful that growth this year can be at pre-Covid levels," said Sanjay Agarwal, chief executive of AU Small Finance Bank, in the lender's quarterly analyst call.
