Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the certificate of deposits programme of Fincare Small Finance Bank Ltd (Fincare SFB).

 

The rating continues to reflect the bank’s adequate capital position, experienced board and leadership team, sound risk management systems and practices bolstered by increasing digitisation, and growth in retail deposits. These strengths are partially offset by the vulnerable asset quality of the bank due to the modest credit risk profile of its borrowers and limited seasoning in its non-microfinance portfolio.

 

On-book assets under management (AUM) grew 26% in fiscal 2023 to Rs 9,516 crore, driven by 73% growth in loans against property (LAP) and over 3 times growth in affordable housing loans (AHL), which now have the second and third largest share in the AUM (16% and 13%, respectively). While overall microfinance disbursements continued to grow, the segment registered a degrowth of 1% on-year at an on-book AUM level and its proportion declined to 59% of the AUM from 76% in the previous year. Overall AUM rose 30% to Rs 9,911 crore from Rs 7,600 crore in fiscal 2022. With the gradual expansion into non-microfinance products in recent years, ability to scale up this portfolio profitably will remain a rating sensitivity factor.

 

Asset quality improved as gross non-performing assets (GNPAs) and net non-performing assets (NNPAs) declined to 3.3% and 1.3%, respectively, in fiscal 2023 from 7.8% and 3.6%, respectively, in fiscal 2022 on the back of write-offs and better recoveries.

 

Profitability improved due to lower credit costs in fiscal 2023, with return on assets increasing to 0.9% versus 0.1% in the previous fiscal. Operating expenses remain high due to expenses incurred towards expansion of branch network and investment in technology.

 

Fincare SFB has ramped up its deposit franchise over the years to reach a deposit base of Rs 8,033 crore as on March 31, 2023, up 24.4% on-year. The share of retail deposits (current account and savings account [CASA] and retail term deposits) stood at a healthy 79.8% as on March 31, 2023, though down from 86.4% a year earlier. On an absolute basis, retail deposits grew 15% year-on-year in fiscal 2023, driven by branch expansion from 919 in fiscal 2022 to 1,231 in fiscal 2023.

Analytical Approach

CRISIL Ratings has assessed the standalone credit risk profile of Fincare SFB.

Key Rating Drivers & Detailed Description

Strengths:

* Adequate capital position, supported by a diverse investor base

The bank is adequately capitalised despite volatility in asset quality owing to socio-political issues. The networth stood at Rs 1,314 crore and tier I capital adequacy ratio (CAR) and overall CAR stood at 18.6% and 20.0% respectively, as on March 31, 2023. On a steady state basis, the bank intends to maintain overall CAR of over 20%. Fincare SFB enjoys strong flexibility to raise equity, whenever required, given its diverse group of investors with high pedigree, some of whom have been associated with the bank since 2010.

 

* Experienced board and senior management team

Fincare SFB transitioned from a promoter-driven entity to a professionally managed one almost a decade ago, and benefits substantially from the experience of its senior management in the financial sector. The core leadership team includes Mr Rajeev Yadav (CEO), Mr Keyur Doshi (CFO) and Mr Soham Shukla (COO – Rural Banking). Other top executives, such as Mr Pankaj Gulati (Chief People Officer) and Mr Kishore Mangalvedhe (COO-South, Rural Banking), have also been with the bank for over eight years.

 

The board comprises eminent persons from the financial and allied sectors. They have rich domain expertise and extensive experience in the fields of microfinance and self-help groups, audit and accounts, banking, taxation, technology and strategy.

 

* Sound risk management systems and practices, bolstered by digital initiatives

Over its operational history, previously as an MFI and now as a bank, Fincare SFB has adjusted its systems and processes to match its scale and nature of business while keeping technology at the forefront. This has helped scale up the operationally intensive microfinance business and continues to anchor the bank’s retail portfolio. The bank has adequate audit and internal control mechanisms, which include a separate operational risk function. Since the amalgamation of Disha Microfin and Future Financial Services Ltd (FFSL), the board and senior management team have taken initiatives to enhance digitisation of operations. The bank has launched an application called Fincare Connect, which helps connect millions of micro connectors and garner more business. As part of its long-term strategy, the bank had launched ‘101 first account’, a zero balance digital savings account with instant account opening feature. Last year, it launched Nivantran application for quick internal approvals. All these endeavors reflect the bank’s focus on digitisation.

 

* Rising deposit base, driven by growth in retail deposits

Fincare SFB had a deposit base of Rs 8,033 crore as on March 31, 2023, accounting for 72% of overall external borrowings. The share of retail deposits in the overall liability franchise has grown in tandem, anchored by the bank’s ability to leverage its base of over 34 lakh retail borrowers on the asset side, of which majority are now deposit customers. The bank had a healthy share of retail deposits (CASA and retail term deposits) at 79.8% as on March 31, 2023, albeit down from 86.4% a year earlier. The traction in retail deposits imparts granularity to liabilities.

 

The CASA share moderated to 33.1% of total deposits and 23.7% of total external borrowings (including deposits) as on March 31, 2023, from 36.5% and 24.9%, respectively, a year earlier. However, on an absolute basis, it rose to Rs 2,656 crore in fiscal 2023 from Rs 2,343 crore in fiscal 2022. Cost of funds declined to 6.9% in 2023 from above 10% in fiscal 2017. Ability to sustain growth in retail deposits remains a key monitorable.

 

Weakness:

* Modest credit risk profiles of borrowers

While the share of microloans reduced to 59% of the on-book AUM and 61% of the overall AUM in fiscal 2023 from 76% in fiscal 2022, it continues to comprise a significant portion of the portfolio. The bank offers microfinance loans to clients with below-average credit risk profiles and lack of access to formal credit. These customers belong to the semi-skilled/self-employed category and their income may be volatile and dependent on the local economy. The slowdown in economic activity in the wake of the nationwide lockdown imposed in March 2020 to curb the spread of Covid-19 affected the cash flows of such borrowers, restricting their repayment capability. Moreover, this segment of borrowers remains exposed to idiosyncratic risks on account of socio-political factors. As economic growth is picking up, ability of the bank to reinstate repayment discipline among customers will be a key monitorable.

 

* Vulnerable asset quality

The bank’s asset quality has remained volatile since Covid-19 broke out in March 2020. As a result, GNPAs and NNPAs worsened from 0.8% and 0.4%, respectively, as of March 2020, to 6.4% and 2.8%, as of March 2021, and to 7.8% and 3.6%, respectively, as on March 31, 2022, post the second wave of the pandemic. However, GNPAs and NNPAs declined to 3.3% and 1.3%, respectively, as on March 31, 2023. Additionally, the provisioning coverage ratio improved to 61% in fiscal 2023 from 56% in fiscal 2022 and restructured portfolio stood at Rs 81 crore (0.8% of the AUM as on March 31, 2023). The improvement in asset quality was driven by strong focus on collections with collection efficiency improving to 99.7% in March 2023 from 72% for May 2021 during the pandemic. Ability to control asset quality as the bank scales up in its target market segments remains a monitorable.

 

* Limited seasoning of the non-microfinance portfolio

Fincare SFB has a limited track record in the non-microfinance segment, which accounts for 41% of on-book AUM, with vintage of just over four years in AHL, loans against gold and institutional finance. Other products such as two-wheeler loans were introduced only in fiscal 2019. LAP and AHL form the bulk of the non-microfinance portfolio, and stood at 16% and 13%, respectively, of the on-book AUM as of March 2023. As the bank intends to increase share of the non-microfinance segments, ability to maintain sound asset quality while managing growth and profitability across economic cycles will be a key monitorable.

Liquidity : Strong

The bank had excess statutory liquidity (SLR) of Rs 905 crore and liquidity coverage ratio (LCR) of 187% as on March 31, 2023. Based on its structural liquidity statement dated March 31, 2023, there were no material negative gaps in buckets for up to one year. Excess SLR stood Rs 668 crore as on April 30, 2023. Liquidity is supported by access to refinance limits from financial institutions. As a scheduled commercial bank, Fincare SFB has access to liquidity adjustment facility, marginal standing facility and interbank markets in addition to certificate of deposits.

Rating Sensitivity factors

Downward factors

• Deterioration in asset quality with scaling up of business, leading to an adverse impact on profitability and capital position
• Inability to garner retail deposits, leading to reduction in share in the total deposit base below 30% for a prolonged period

About the Bank

Incorporated in June 2017, Fincare SFB is an amalgamation of Disha Microfin and FFSL. Promoted by Mr Sameer Nanavati, Mr Keyur Doshi, Mr Vivek Kothari and Mr Soham Shukla, Disha Microfin was engaged in the microfinance business since February 2009 in Gujarat. FFSL, promoted by Mr Dasaratha Reddy and his family members, was in the same business since 2007 in Tamil Nadu, Karnataka and Andhra Pradesh. In October 2010, Indium IV (Mauritius) Holdings Ltd (Indium IV), advised by India Value Fund Managers (IVF), acquired stake in Disha Microfin and FFSL to integrate the entities. By mid-2012, the functional integration of Disha Microfin and FFSL was completed with both companies using the same software and technology, having common ground-level processes and similar organisation structure. The Fincare brand was established in 2014.

 

In September 2015, Disha Microfin received in-principle approval from the Reserve Bank of India (RBI) to set up a small finance bank with the objective of enhancing financial inclusion. The bank, Fincare SFB, commenced operations in July 2017. Through a gazette order dated April 13, 2019, the RBI directed the inclusion of the bank in the Second Schedule of Reserve Bank of India Act, 1934.

Any other information: Not applicable