“We hereby inform you that the bank has received a letter dated August 18, 2021 from Mr Nitin Chugh tendering his resignation from the position of Managing Director and CEO of the Bank w.e.f. close of business hours on September 30, 2021,” Ujjivan SFB stated in its BSE filing on August 19.
The resignation will come into effect from September 30, 2021,, the lender said in a regulatory filing on August 19. Chugh has confirmed, in his resignation letter, that he is resigning due to personal reasons and “there are no material reasons”, the bank said.
Chugh’s tenure as Director of the bank, which is co-terminus with his tenure as Managing Director and CEO, would also end after his resignation comes into effect. Consequently, he shall also cease to be Key Managerial Personnel of the Bank in terms of Section 203 of the Companies Act, 2013,” the lender said.
The bank said the filing that its board has taken note of Chugh’s resignation letter and has appreciated his valuable contribution to the board and the bank during his association. “The board wishes him the very best in his future endeavours”, it added.
Microfinance loan repayment has risen sharply to about 90% on an average by the end of July from a low of 65-75% in May-June with economic recovery and the number of Covid-19 cases coming down. Industry captains expect business to be back to full swing not before the third quarter as the impact of the second wave is still being felt while the sectoral loan volume shrunk 14% in the April-June period.
“We are expecting recovery around the Durga Puja season. This is the time when business grows. But if the third wave comes, the recovery may be delayed by another quarter,” said Chandra Shekhar Ghosh, managing director at Bandhan Bank, the country’s largest microfinance lender. About 60% of Bandhan’s loan assets are unsecured micro loans.
The largest NBFC-MFI CreditAccess Grameen in terms of loan outstanding said its collection efficiency improved to 91% (excluding arrears payment) in July compared with 81% in June. The same parameter for Ujjivan Small Finance Bank improved to 93% in July from 78% in June. It was 79% as against 70% for Suryoday Small Finance Bank.
Bandhan Bank’s collection efficiency in micro loans was 77% in June.
All microfinance lenders have collectively disbursed Rs 25,820 crore in the June quarter, which was 14% lower than in the March quarter, according to data collated by Sa-Dhan, the oldest microfinance industry association.
Lenders across the board have raised their respective loan provisions in the June quarter to cover the possible future credit risk and took a hit on their profitability.
“We expect business — both in terms of loan disbursement and repayment – to be back to March level (pre-second wave level) by September,” Satin Creditcare Network chairman HP Singh said.
The sector’s gross loan outstanding fell 14% to Rs 2,14,528 crore from Rs 2,49,333 crore three months back.
“We have seen a recovery in microfinance operations since July,” said P Satish, executive director at Sa-Dhan.
A third wave, if it comes, can create further disruptions.
“Just about when we were coming out of the impact of Covid-19, the second wave struck. Though we had higher disbursement during the first quarter of the current fiscal compared to the same period of previous fiscal, business of the sector faced major challenges with full and partial lockdowns. Small MFIs bore the major brunt as access to funds from banks was restrained,” Satish said.
We would have to stabilise the organisation, reverse merge and then, we will take up the universal bank licence largely because it is more efficient to operate from a capital perspective because the capital adequacy requirement in small finance bank is 15% whereas an effective capital adequacy requirement in universal bank is about 8%, says Samit Ghosh, Founder, Ujjivan Financial Services.
Ujjivan Financial Services is the holding company of Ujjivan Small Finance Bank and we have seen the small finance bank reporting losses and higher NPAs which can be attributed to the second Covid wave. But what led to such losses and when can we expect to return to profitability? As far as the business is concerned Nitin (Nitin Chugh, MD & CEO of Ujjivan SFB) is the right person to answer this question. From our perspective, obviously the impact was because of the second Covid wave, which took a toll on our portfolio and right now it is in recovery mode. But we do not know when the next wave is going to hit because not enough Indians have been vaccinated and with the festive season coming, there could be another knock down effect on us.
We have been very concerned about the portfolio quality and the management of the portfolio business. We are closely monitoring it and this is something we have been worried about not just now, but from last year itself. We are a very conservative organisation and we always believed that we should provide upfront and take appropriate action because that has been our philosophy in the past and that is what we would like to see again.
RBI has approved the merger of holding companies with small finance banks. When do you see that happening for your company? We complete five years in the beginning of February and we can apply three months before that. So we would be applying three months before February, around November. Once RBI clears us for reverse merger, the whole process might take between 9 and 12 months. There are hurdles not only in the RBI but also from the Sebi perspective. There are a couple of issues for which they have to give us clearance. We are keenly watching what happens to Equitas because they are ahead of us in this process and we will follow suit. But our process will start in November and once our approval is there by February, it will take another 9 to 12 months.
A lot of people are watching very closely whether or not you have the intention to become a universal bank. Is that something that you are still considering and what work is being done towards that end? Firstly we have to reverse merge. That is the first step and it will stabilise us. We are going through a very difficult time right now, not only from a portfolio quality point of view but also from a people retention point of view. Lot of the people who actually built Ujjivan have left and that makes life more difficult for us. We would have to stabilise the organisation, reverse merge and then, we will take up the universal bank licence largely because it is more efficient to operate from a capital perspective because the capital adequacy requirement in small finance bank is 15% whereas an effective capital adequacy requirement in universal bank is about 8%. That we will take up after our own reverse merger process is over,
Ujjivan Small Finance Bank restructured around Rs 571 crore of loans up to July under Resolution Framework 2.0, as around Rs 750-800 crore of loans might require restructuring in Q2, says MD & CEO Nitin Chugh. In an interview with Mithun Dasgupta, Chugh informs collection efficiency for every single state improved in July compared to June. However, Assam and Kerala are lagging behind. Excerpts:
In the first quarter this fiscal, Ujjivan Small Finance Bank’s net interest income (NII) fell 16% year-on-year at Rs 384.40 crore. What are the reasons behind that?
The NII was lower because we had elevated levels of non-performing assets (NPAs) at 9.8% (gross NPA ratio). So, that book did not earn very much. The overall book was more or less at the same level, where there was around 2% de-growth. Thus, income earning on assets reduced.
What is the outlook for the NII for second quarter?
That is the hard one to predict right now. Our business is improving and collections have also improved to 93% (in July, against 78% in June). We will be able to actually come out with it only when we finish the quarter. But things are improving, so that gives us confidence to at least believe that Q2 will be better than the Q1. Only caveat is that we don’t get confronted with the third Covid wave. In Q1, we had worked under very restricted conditions on account of Covid second wave and lockdowns. In lockdowns, both collections and business are impacted. And, then for our segment of customers, a lot of face-to-face interactions are required. Thankfully, in the first quarter, we got 15 days of April and 15 days of June to recover.
Disbursements in the Q1 was up by around 180% year-on-year, while quarter-on-quarter there was a 69% fall… In Q1FY21, there was nothing at all, absolutely no movement because of the prolonged sets of lockdowns. Last year, things had probably opened up in June and July. In our business, in microfinance segment, we largely deal with a lot of existing customers. In Q1FY21, because we were unable to move for almost the entire quarter due to restrictions, face-to-face interactions did not happen and we could not deal with those customers. There were loan moratorium also. When people avail moratorium they don’t want to take any new loans.
However, this time, since we got 15 days of April because of the continuing momentum from the Q4FY21, that sustained itself for sometime till the lockdowns came in place. And when the restrictions started to go away by June 15, then the momentum started to come back. Right now, demands for all kinds of loans have come back quite strongly. Disbursements fell on quarter-on-quarter basis because Q4FY21 had been a very good quarter for us.
Do you have loan exposure in Kerala? What is the collection efficiency for the state?
In Kerala, our loan portfolio is around Rs 214 crore, not a very large one. Kerala for us is not among the top five states in any case. Our top five states are Tamil Nadu, West Bengal, Karnataka, Maharashtra and Bihar. Every single state improved in July compared to June, Kerala has also improved. However, it is not comparable to some of the other states, it is lagging behind. At the end of June, collection efficiency in Kerala stood at 39%, and in July, it was 86%.
In Assam, has the collection efficiency improved? In Assam, the collection efficiency was 41% in June, while in July, it was 59%. So, Assam is still lagging. Most of the lenders are at the similar kind of numbers in the state.
Up to July, what was the total amount of loans restructured under Resolution Framework 2.0?
We have restructured around Rs 571 crore of loans. In July, we restructured around Rs 501 crore, out of whichRs 480 crore is from microfinance.
Kolkata: Ujjivan Small Finance Bank has reported Rs 233 crore net loss in the June quarter as compared with Rs 55 crore net profit in the year ago period on rising stress on asset quality and shrinking business.
Loan repayment was severely hit due to the second wave and fresh lockdowns with collection efficiency fell to 78 per cent in June against 94 per cent in March, the bank said. The ratio improved to 93 per cent in July for the bank.
“The second Covid wave and consequent restrictions and lockdowns lashed the industry, especially the micro banking sector,” chief executive Nitin Chugh said.
Its operating profit fell 24 per cent at Rs 163 crore compared with Rs 215 crore over the same period.
The bank created a floating provision of Rs 250 crores to absorb the impact of potential slippages in near future. Its total provision stood at Rs 1,149 crore, covering 8.2 per cent of gross advances, which shrunk 2 per cent year-on-year to Rs 14,037 crore. Provision coverage ratio improved to 75 per cent from 60 per cent three months back.
Its asset quality sharply deteriorated with gross non-performing assets ratio rising to 9.8 per cent at the end of June as against 1 per cent a year back. Net NPA was at 2.7 per cent compared with 0.2 per cent for the same period. The bank wrote off loans worth Rs 280 crore.
“We are hopeful that our customers will resurrect their livelihoods and continue to be resilient. We continued to diversify our asset book as a strategic approach,” he added.
The bank’s non-micro banking portfolio grew to 32 per cent from 22 per cent over the year with the secured portfolio rising to 30 per cent from 21 per cent earlier.
Its deposits rose 24 per cent at Rs 13,673 crore with current and savings bank account ratio being at 20.3 per cent, an improvement from 14.2 per cent a year back.
In a regulatory filing, IDFC said that the RBI on July 20 clarified that “after the expiry of lock-in period of five years, IDFC Ltd can exit as the promoter of ‘IDFC FIRST Bank Ltd”.
Accordingly, the company can now exit as the promoter of IDFC First Bank, as the five year lock-in period has ended.
The IDFC Bank was created by the demerger of the infrastructure lending business of IDFC to IDFC Bank in 2015.
The RBI clarification could potentially lead to a reverse merger, which would be beneficial to IDFC Limited shareholders by increasing shareholder value.
Reverse merger
IDFC First Bank, which started operations in October 2015, completed five years on September 30, 2020. Under the rules then, a non-operating financial holding company, IDFC Financial Holding Co Ltd was mandated to hold a minimum of 40% of the paid-up capital of the bank for five years. IDFC holds 100% stake in the holding company, and in turn 36.56% in the bank.
The board may consider a reverse merger between IDFC and the bank, and collapse the holding company structure.
An application would have to be submitted for such a reverse merger. The RBI had mandated a holding company structure to ring-fence the bank from other financial services businesses of the group. A reverse merger, which has been in talks, would be beneficial to the shareholders of IDFC as it would remove the holding company discount. While the 2013 rules mandated it, in the 2016 guidelines for “on-tap” bank licensing, the RBI had not sought the requirement of holding a company for promoter if there are no other group entities.
IWG suggestions
The RBI’s internal working group on ownership of private banks had also recommended allowing banks, currently under holding company structure, to exit if they do not have other group entities. Recently, the RBI allowed Equitas Small Finance Bank and Ujjivan Small Finance Bank to apply for the merger of the holding company with the bank.
While the suggestions of the internal working group have not yet been implemented, the regulations are clear in terms of the holding company quitting only if it has no other organisations in its fold, paving an alternative road to departure for corporations like IDFC.
Ujjivan Small Finance Bank said it would initiate steps for the amalgamation of the holding company Ujjivan Financial Services Ltd with the bank after RBI’s nod. Samit Ghosh, Founder, Ujjivan Financial Services, helps us understand how it may be good news for shareholders.
Now that, RBI has given nod to SFBs and respective holding companies to apply for a merger, help us understand how really does this help in unlocking share value for you? This is extremely good news which we were expecting for quite some time and the first in the line of course is Equitas. Equitas and us, we worked earlier on this and we are very glad, it has come through. Basically, there is a holding company structure in which is the Ujjivan Financial Services Ltd. which owns the bank Ujjivan Small Finance Bank and we own 83% of the bank so, what the RBI has committed is that the holding companies can reverse merge into the bank and there will be one entity. Before that, there was the uncertainty of this and consequently, we are the holding company stock– UFSL stock was anywhere between 40% to 50% discount. Now, this discount will gradually narrow, so, there is a tremendous upside on the Ujjivan Financial services stock.The bank stock depends on how the bank actually performs in terms of business, but this is extremely good news for the Ujjivan Financial Services stock- the holding company stock, and that was the original shareholders. We have about 80,000 retail shareholders out of which there are at least 10,000-15,000 employee shareholders, who originally invested in the bank and this is extremely good news for them.
Our fifth year is in February 2022, and we can apply three months before that -for the reverse merger—with the RBI as per its new direction. RBI will evaluate the proposal and see whether we can go ahead, chances are that things are normal, we will be allowed to reverse merge. There is one issue which was there, by the fifth year the shareholding of the holding company was required to come down to 40% but we are quite confident that since RBI is allowing us to totally reverse, much of it- at the end of five years, going to be waved, so we do not think that is an issue at all. It is good news for the holding company shareholders.
When will this merger process be completed? We will apply late October-early November and then RBI will give us the approval, I think the process cannot start before our fifth anniversary, which is early February 2022 and the whole legal and all that clauses NCLT etc. can take anywhere between eight to 12 months, so, that is the kind of time frame we are looking at.
Post the merger which entity will remain listed? The bank will remain, the holding company will completely disappear so all the shareholders of the holding company will then become shareholders of the bank.
What has been the impact of the second wave on your business, are you now seeing faster recovery as compared to what we have witnessed last year and in light of that what would be the outlook on your growth disbursements for FY22? I am not part of the bank, I think this question you should raise with Nitin Chugh, who is the managing director of the bank but what I can tell you overall in the industry-the second wave has receded to a certain extent, things are much better now, but this kind of crisis, which we are facing is an unprecedented crisis. We had faced an earlier crisis, demonetisation, which was like one shock kind of crisis and we overcame, but here, because of the multiple waves of the COVID crisis–it hits our customer and business in waves and the ultimate solution getting the population of India 70% or 80% vaccinated. Unfortunately today, the vaccine availability is still an issue, hopefully, in a couple of months from the production of the vaccine to the scheduling of the production in India, there will be abundant supply. There was a hesitancy even among our customer base before the second wave, but post the second wave that hesitancy has also gone. As as soon as the vaccines are available and we are able to vaccinate all our customer base or the entire population in India, then there is going to be a solution to this problem.
So, the most important thing to do is proactively help our customer base to get vaccinated, meanwhile RBI has given a lot of restructuring, opportunities for good customers and also to provide them additional cash, which is very important because people have either exhausted their savings or their working capital, and not only the restructuring but providing them the extra cash would help them but this has to be carefully done only for our good customers and that process is sort of a lengthy process. So, I think there is time till September, the bank is undertaking that and most micro finance institutions are undertaking that, it has to be done very carefully and I think that will help us to get out of the crisis.
The proposed uniform regulatory framework for the microfinance sector by Reserve Bank would help the sector expand, become competitive yet safeguard the borrowers from the debt trap.
Under the new proposed rules, microfinance institutions (MFIs) can provide collateral-free loans to households at interest rates determined by their boards. They will get the freedom to set rates and end regulatory cap on interest rates
The RBI has proposed a debt-income ratio cap so that the loans should be given in such a way that the payment of interest and repayment of principal for all outstanding loans of a household at any point of time should not cross 50 per cent of the household income.
Here’s how the changes will impact the sector, companies and the borrowers
The proposed regulations provide more flexibility to non-banking finance companies-microfinance institutions (NBFC-MFIs) in the pricing of loans. The removal of the interest rate ceilings is expected to increase competition on loan pricing.
A uniform regulatory framework for the microfinance sector will ensure a level playing field among all regulated players.
Capping the borrowers’ indebtedness at 50% of household income may impact the overall credit growth in the microfinance industry. With a cap on the fixed obligation to income ratio at 50%, the maximum permissible indebtedness of rural microfinance borrowers could be lower than the current levels
The RBI’s recommendations can ensure responsible lending in the microfinance space. A misuse of flexible pricing guidelines for NBFC-MFIs may not be possible because the pricing of loans would be market-driven on the back of competitions.
Bandhan Bank and Ujjivan Small Finance Bank may be the hardest hit, given the high ticket size of their loans. Unlike in the past when no more than two MFIs could lend to the same borrower, this limit will now apply to all lenders.
With the onus of assessment of household income shifting to lenders, they will need a board-approved plan for the same. The stipulation for the assessment of household income may lead to an increase in borrowing costs for customers. Each NBFC-MFI would need to adopt an interest rate model taking into account relevant factors such as cost of funds, margin and risk premium and determine the rate of interest to be charged for loans and advances.
The lifting of the interest rate cap would benefit MFIs as their margins will not be under pressure, but put the onus of fair pricing on MFIs
Key proposals
The key proposals of ”Consultative Document on Regulation of Microfinance” include a common definition of microfinance loans for all regulated entities, capping the outflow on account of repayment of loan obligations of a household to a percentage of the household income, and a board-approved policy for household income assessment.
It also suggests no requirement of collateral and greater flexibility of repayment frequency for all microfinance loans.
As per the consultative paper by the RBI, a microfinance loan would mean collateral-free lending to households with an annual income of Rs 1.25 lakh in rural areas and Rs 2 lakh at urban and semi-urban centres.
The entities engaged in microfinance lending will be required to display board-approved minimum, maximum and average interest rates charged on loans. They will also be required to disclose pricing related information in a standard simplified fact-sheet.
There will be no prepayment penalty, said the consultative paper on which the RBI has invited comments from the stakeholders by July 31.
Ujjivan SFB has tied-up with Progcap for end-to-end digitisation of invoice-based financing of MSMEs for their small tenor working capital requirements. This ties-up the bank’s venture into supply chain financing and will fund dealers, sub-dealers against purchases made from recognised brands through short-term overdraft facility.
The bank said, “The entire lending process, right from the lead generation, lead screening, loan sanctioning, document execution and customer on-boarding and repayments has been digitized through Progcap’s data-driven tech platform.”
Rajiv Kumar Pathak, Business Head – Medium and Small Enterprise, Ujjivan Small Finance Bank said, “This is a win–win arrangement for all stake holders in the MSME business ecosystem i.e. bank, fintech partner, buyers and suppliers. The customer gets working capital in the form of supply chain finance against the invoices raised along with freedom to clear dues with regular cash flow. Digital on-boarding gives us an access to larger geography where we don’t have direct reach through USFB branch network.”
Dheemant Thacker, Head – Digital Banking, Ujjivan Small Finance Bank said, “Driving business through fintech partnerships using Ujjivan Small Finance Bank’s full-stack API Banking platform is at the core of our digital strategy. With our first such partnership in the SME space – Progcap, we are able to offer fully digital, innovative lending services to small businesses and partner with them in their growth. In a short period of time, we have been able to offer supply chain financing to a significant number of businesses and will continue to ramp up our efforts to support these businesses as they battle the uncertainties of the current pandemic.”
Pallavi Shrivastava, Co-Founder, Progcap said, “Supporting MSMEs linked with large corporates is core to what we do at Progcap. We are excited to partner with Ujjivan Bank in this journey. Combined with Progcap’s industry first product that uses heavy data driven underwriting and Ujjivan’s digital first approach, we aim to offer this product to a large number of underserved MSMEs. Progcap is working with similar technology driven lending partners in furthering its mission to support millions of small businesses access credit for the first time.”
Small finance banks (SFBs), which depended heavily on loan moratorium last year, are likely to be hit by delinquencies as Covid crimps the incomes of their mainstay borrowers.
However, they are inadequately prepared to face the barrage of asset quality issues that may hit them. In contrast, the top private sector banks are adequately prepared to face the crisis.
The provision coverage ratio, or amount set aside for bad loans, is less than 60% of total bad loans. for three listed banks—Equitas Small Finance Bank Ltd, Ujjivan Small Finance Bank Ltd and AU Small Finance Bank.
AU Small Finance Bank’s PCR fell to 50% in Q4 from 53% earlier, while Equitas Small Finance Bank, the most conservative among the SFBs, saw a 25% decline in the overall provision, compared with last year. Ut made additional provision to Rs 153 crore at the end of the fourth quarter.
Ujjivan Small Finance Bank’s PCR fell to 60% in the fourth quarter, from 80% in the year-ago period. The bank made a provision of Rs 170 crore as of March-end. Private banks’ PCR
For HDFC Bank total provisions (comprising specific, floating, contingent and general provisions) were 153% of the gross non-performing loans as on 31 March 2021.
ICICI Bank had substantially increased its provision coverage ratio (PCR) to 86 per cent with pro forma PCR of 78 per cent, the highest in the industry.
Axis Bank’s provision coverage ratio, including write-offs, stood at 88% in the fourth quarter.
SLTRO boost
While the small finance banks did not get moratorium relief, the Reserve Bank of India (RBI) has announced a special long-term repo operation (SLTRO) for small finance banks. The central bank conducted the special operation of Rs 10,000 crore at repo rate, Das said.
“Small finance banks (SFBs) have been playing a prominent role by acting as a conduit for the last-mile supply of credit to individuals and small businesses,” Das said earlier this month announcing the relief measures.
“To provide further support to small business units, micro and small industries, and other unorganised sector entities adversely affected during the current wave of the pandemic, it has been decided to conduct special three-year long-term repo operations of Rs 10,000 crore at repo rate for the SFBs, to be deployed for fresh lending of up to Rs 10 lakh per borrower,” Das said, adding that the facility will remain open till October 31, 2021. Priority loans
The RBI also has decided to allow the classification of priority sector lending for loans given by small finance banks (SFB) to micro-finance institutions (MFI) for on-lending to individuals.
The decision has been taken to address the liquidity issues of MFIs amid the severe Covid crisis.
RBI Governor Shaktikanta Das said: “In view of the fresh challenges brought on by the pandemic and to address the emergent liquidity position of smaller MFIs, SFBs are now being permitted to reckon fresh lending to smaller MFIs (with asset size of up to Rs 500 crore) for on-lending to individual borrowers as priority sector lending.” This facility will be available up to March 31, 2022.
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