With collection efficiencies slowly moving back to normalcy, small finance banks hope to be in expansion mode in the coming months even though a segment of customers remain impacted by the Covid-19 pandemic.
Along with higher disbursements, branch expansion and the listing exercise for some of them are likely to gather pace in the coming months.
Small finance banks came into existence after 2016 and were set up with the aim of furthering financial inclusion to the unbanked and under-served areas and customers. There are 10 entities that had started SFB operations, of which three are listed.
The total size of balance sheet was ₹1.33 lakh crore, noted a recent report by CARE Ratings based on RBI’s recent Report on Trend and Progress of Banking in India. “Their share in the overall banking system was very insignificant at 0.7 per cent,” it noted.
‘Reset’ opportunities
SFBs say that while collection efficiencies are now normalising, some customer segments and geographies are still lagging behind.
A large chunk of their customer base is from the unorganised sector or are urban workers and amongst the worst hit by Covid-19 and the lockdown, in the form of job losses and salary cuts. For segments like mall and restaurant staff, cab and auto drivers, commercial vehicle owners and housemaids, their salary and jobs are yet to get back to normal, which has meant that their loan repayments too are yet to go back on track.
States like Maharashtra, West Bengal, Assam and Punjab too are lagging in collections in micro banking due to a variety of reasons.
Collection efficiencies have been showing month-on-month improvement, ranging from 80 per cent to 95 per cent for most banks. For the quarter ended December 31, 2020, the three listed SFBs — AU Small Finance Bank, Equitas Small Finance Bank and Ujjivan Small Finance Bank — saw improving collection efficiency across most segments and geographies.
“Collections in non-delinquent accounts are also moving close to pre-Covid levels; as of January 2021, around 95 per cent of customers are paying EMIs as against 91 per cent as of October 2020,” said Nitin Chugh, Managing Director and CEO, Ujjivan SFB.
Equitas SFB reported collection efficiency of 105.36 per cent in December 2020 and billing efficiency of 88.73 per cent. It also said that collections are reaching the pre-Covid level.
AU SFB too reported in its third quarter results that collection efficiencies and activation rates have achieved normalcy across most segments.
Among the unlisted banks, ESAF SFB reported collection efficiency of 94 per cent in January.
“Collection efficiency has not come back fully but with the economy having substantially opened up, reverse migration has also happened,” noted the head of an SFB, adding there are now opportunities to grow and “reset” finances and processes.
Renewed credit demand
Banks have reported renewed credit demand across most segments from borrowers, including micro finance, affordable housing, small business loans and personal loans. Provisioning has also been done upfront to ensure that the focus can now be on growth.
Both Equitas SFB and AU SFB have reported net profits for the third quarter of the fiscal and though it reported a net loss, Ujjivan SFB has made significant provisions in the quarter.
Gross non-performing assets ratio has also been contained for all three listed SFBs at less than 2.5 per cent at the end of the third quarter.
Till now, advances have seen muted growth. AU SFB reported 14 per cent increase in advances growth on annual basis, 11 per cent growth on quarter-on-quarter basis in December 2021 quarter. For Ujjivan SFB, disbursements for the third quarter of 2020-21 fell to ₹2,184 crore vs ₹3,403 crore a year ago.
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PN Vasudevan, MD and CEO, Equitas SFB, said the lender disbursed around ₹2,500 crore in the third quarter, which is about 80 per cent of pre-Covid levels, and expects it to grow in the fourth quarter. “As of December, our advances grew by 19 per cent year-on-year and now about 79 per cent of our advances is secured,” he said in an investor call post the third-quarter results.
“Disbursements are more or less back to pre-Covid levels and even exceeded it in January, when we disbursed ₹650 crore of micro loans. Most of the micro businesses are getting back to normal, except a few sectors, even though challenges are there. Over a period, recovery is very promising and demand is also coming,” said K Paul Thomas, MD and CEO, ESAF SFB.
CARE Ratings noted that an advantage that most SFBs enjoy is that they have been paying higher interest rates on deposits to garner funds which, in turn, gets translated on the lending side too. “This can be seen in the returns on advances, which is around 20 per cent and is higher than the other banks’ by 8-11 per cent,” it said.
Small Finance Banks have greater presence in well-banked States, says RBI report
Branch expansion
Branch expansion is also likely to be high on the agenda for most of these lenders. The RBI’s latest monthly bulletin had noted that SFBs have greater concentration of branch network in relatively well-banked States.
While there has been a rapid growth in the branch network of SFBs since their inception, this growth has been markedly concentrated in the Southern, Western and Northern regions, which are known as the relatively well-banked regions in the country, RBI officials Richa Saraf and Pallavi Chavan said in an article in the bulletin.