Detailed Rationale

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

 

The rating continues to reflect the strong capitalisation of the bank, steady traction in retail term deposits, and extensive experience of the board and senior management. These strengths are partially offset by moderate earnings profile, weak albeit improving, asset quality metrics, and modest credit risk profile of the borrowers with low seasoning of the non-microfinance business.

 

The bank’s assets under management (AUM) grew by 21% year on year in fiscal 2023 to Rs 6,114 crore as on March 2023 from Rs 5,063 crore as on March 31, 2022. Growth was driven by pent up demand across asset classes resulting in higher disbursements post the second wave of Covid 19. In H1 2024, AUM grew by 13% year to date to Rs 6,921 crore. Microfinance loans form a dominant proportion of overall advances at 59% (although improved from 64% in FY22) with the balance 41% comprising home loans, commercial vehicle loans, and loan against property. Going ahead, ability to profitably scale up the non microfinance portfolio will remain a monitorable over the medium term.

 

The Bank has healthy capitalization with total CAR at 33.23% as of September 30, 2023. The gross non-performing assets (GNPA) and net NPA (NNPA) improved to 2.9% and 1.5%, respectively, as of September 2023 and to 3.1% and 1.6%, respectively, as of March 2023 as against 11.8% and 6.0% as on March 31, 2022.The decline in GNPA was due to sale of  assets to Edelweiss ARC and write off's in fiscal 2023. Additionally, bank has outstanding standard restructured portfolio of around Rs 22 crore as of March 31, 2023 (0.4% of the AUM). The bank reported a profit of Rs 98 crore in the first-half of the current fiscal and Rs 78 crore in fiscal 2023 as against a loss of Rs 93 crore in fiscal 2022. Over the medium term, the ability of the bank to sustain its improved asset quality and earnings profile will remain key rating sensitivity factors.

 

On the liabilities side, the ramp up has continued, evidenced by a robust 34% y-o-y growth in deposit base in fiscal 2023 and another 24% year to date (YTD) in H1 2024. As on September 30, 2023, the bank’s total deposit base was Rs 6,388 crore which constituted 27.9% of external liabilities. Retail deposits (retail TD + CASA) formed 77% of total deposits and CASA formed 15.7% of the total deposits.

Analytical Approach

CRISIL Ratings has assessed the standalone credit risk profile of Suryoday SFB for arriving at its rating.

Key Rating Drivers & Detailed Description

Strengths:

• Strong capitalisation: Suryoday’s capital position remained strong reflected with total CAR of 30.23%, respectively as of Sep 2023 (33.7% as on March 31, 2023). Networth as on September 30, 2023 stood at Rs 1,684 crore as against Rs 1,584 crore as on March 31, 2023 . The CAR is likely to be healthy at above 25% while gearing should remain below 4 times, over the medium term. The bank had raised fresh equity of Rs 248 crore through its IPO in March 2021 which strengthened its capitalization. Additionally, the bank has had adequate flexibility to raise capital in the past: it raised Rs 288 crore in fiscal 2017, Rs 25.6 crore in 2018, around Rs 248 crore of equity in 2019 and Rs 63 crore of equity in 2020.

 

• Steady traction in retail term deposits: The deposit base has registered steady growth since inception with an increasing share of retail deposits as a proportion of total deposits. Deposits grew by 34% in fiscal 2023 to Rs 5,166 crore. The share of retail deposits increased to 73% as of March 2023 from 50.3% in March 2020. In the first-half of fiscal 2024, the Bank had a deposit base of Rs 4,207 crore, of which 77% were retail deposits. Moreover, over 100% of the bank’s bulk deposit is non-callable in nature.

 

Granularity of deposits has also improved as the share of term deposit in the less than Rs 15 lakh ticket size increased to 43% in March 2023 from 40% in March 2021. Of the total term deposits, as on March 31, 2023, 58% were for a period exceeding a year. This helps contain the risk of unexpected reduction in deposit base.

 

Traction in CASA has remained low and stood at 15.7% of total deposit base as of September 30, 2023, as compared to 17.0% of total deposit base and as of March 31, 2023.

 

• Extensive experience of the board and senior management: The senior management has longstanding experience in the financial services sector. Mr Baskar Babu, the managing director and Chief Executive Officer, is one of the promoters who has held senior positions in several institutions. Board of directors and senior management comprise experienced and renowned professionals from the financial services sector, strongly oriented towards establishing high-quality and scalable systems and processes. 

 

Weaknesses:

• Moderate earning profile: After profitability deteriorated in fiscal 2018, it improved in 2019 and again in 2020. In absolute terms, pre-provisioning profit was Rs 306 crore in fiscal 2020 against Rs 212 crore in 2019. Operating expense ratio has also remained under control despite transition to from an MFI to a bank.

 

However, earnings were affected in fiscal 2021 due to interest reversal on account of higher NPAs, leading to decline in net interest income. Furthermore, because of pandemic-related stress, the bank reported higher provisioning that led to profit after tax of Rs 12 crore in fiscal 2021 with return on assets of 0.2%; against PAT of Rs 111 crore and return on assets of 2.5% in fiscal 2020.

 

Profitability was further affected in fiscal 2022 due to higher credit costs (5.36% in FY22 versus 2.8% in FY21) resulting in a loss of Rs 93 for FY22 crore. However, In fiscal 2023, the PAT improved to Rs 78 crore with RoA of 0.9% and to Rs 98 crore and RoA of 1.9% in H12024 on account of reduction in credit cost to 2.6% of average assets in fiscal 2023 as compared to 5.3% in fiscal 2022. Increase in profits is also partially supported by increase in overall average realised yields from 19% in fiscal 2022 to 21% in fiscal 2023. The ability of the bank to sustain its overall profitability, while scaling business across fast growing segments will remain a key monitorable.

 

• Weak, albeit improving asset quality: Over the last two years, asset quality has been impacted owing to the pandemic disrupting the cash flows and repayment capabilities of several borrowers. Asset quality improved with GNPA and NNPA at 3.1% and 1.6%, respectively in March 2023; against 11.8% and 6.0%, respectively, in March 2022. As of September 2023, GNPA and NNPA improved to 2.9% and 1.5%, respectively with provisioning coverage ratio of 50.5%. Additionally, the bank has outstanding standard restructured portfolio of Rs 22 crore as of H1 2024, billing for which has already started from July 2022 onwards.

 

While strong capitalisation provides a buffer against asset quality deterioration, revival to pre-pandemic metrics will take time, and the ability of the bank to reinstate repayment discipline among customers will be a monitorable.

 

• Modest credit risk profile of the borrowers and low seasoning in the non-microfinance portfolio: A significant portion of the portfolio (59% in 1H2024) comprises 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 with volatile incomes that depend on the local economy. Slowdown in economic activity has put pressure on such borrowers' cash flows, thereby restricting their repayment capability. This segment of borrowers continues to be subjected to idiosyncratic risks on account of socio-political factors.

 

As far as the non-microfinance segment is concerned (accounts for 41% of the AUM), the bank’s track record is limited, with low vintage in divisions such as commercial vehicle loans, home loans, and loan against property. The overall portfolio is distributed across Maharashtra (29%), Tamil Nadu (26%), Odisha (13%), Gujarat (12%), Karnataka (6%) and Madhya Pradesh (7%) as of Sep 2023. The Bank also has limited presence in Chhattisgarh, Puducherry, Telangana, Rajasthan, Uttar Pradesh, Chandigarh and Delhi. 

 

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 would be a key monitorable

Liquidity: Strong

Liquidity coverage ratio was healthy at 154.9% as on June 30, 2023. The management has maintained very high liquidity during this period, with excess statutory liquidity ratio of 15% as of June 2023. Moreover, the bank has access to systemic liquidity facilities such as liquidity adjustment facilities and call money market instruments which can be utilized if need be. 

Rating Sensitivity factors

Downward factors:

• Moderation in asset quality alongside growth in non-microfinance segments leading to potential weakening in profitability and capital position
• Inability to garner retail deposits leading to reduction in share in the total deposit base to below 50% for a prolonged period

About the Company

Suryoday SFB started as a non-banking financial institution (Suryoday Micro Finance Ltd) in November 2008, providing micro loans to women in urban and semi-urban areas under the joint liability group model of lending. It commenced operations as a small finance bank on January 23, 2017 and received the status of a scheduled commercial bank in fiscal 2018. As of September 2023, Suryoday SFB had operations across 15 states and Union Territories, catering to 25.1 lakh customers through 635 branches. The loan AUM stood at Rs 6,921 crore as on September 30, 2023. The bank also had outstanding deposits aggregating Rs 6,388 crore as of September 30,2023

Key Financial Indicators

Particulars for the period-ended	Unit	H1 2024	Mar-23	Mar-22
Total assets	Rs.Cr.	10,856	9,878	8,180
Total income	Rs.Cr	836	1,281	1,035
PAT	Rs.Cr	98	78	(93)
Gross NPA	%	2.9	3.1	11.8
Overall CAR	%	30.2	33.7	37.9
Return on assets@	%	1.9	0.9	(1.2)

@Annualised for H1 2024

Any other information: Not applicable