Detailed Rationale

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

 

The rating continues to reflect the strong capitalisation of the bank, improvement in retail deposit profile, and extensive experience of the board and senior management. These strengths are partially offset by weakened earnings profile; low, though improving, share of CASA and the relatively high cost of deposits; deterioration in asset quality metrics; and the modest credit risk profile of the borrowers with low seasoning of the non-microfinance business.

 

In March 2021, Suryoday SFB launched its IPO (initial public offering) and raised Rs 522 crore (including private placement of Rs 274 crore), which further strengthened capitalisation: as on September 30, 2021, tier-1 capital stood at 41.8% while overall capital adequacy ratio (CAR) was 45.9%. Even the share of retail deposits (savings and retail term deposit of ticket size under Rs 2 crore) increased to 83% as of September 2021 from 66% in September 2020. However, asset quality remains severely impacted by the pandemic. As a result, gross non-performing assets (GNPA) and net NPA (NNPA) remained high at 10.2% and 4.5%, respectively, as of September 2021; in addition to restructuring 17.7% of the advances. Given the sustained stress, Suryoday SFB continued with higher provisioning, thus reporting net loss of Rs 50 crore in the first-half of the current fiscal against net profit of Rs 54 crore in the corresponding period previous fiscal. However, pre-provisioning operating profit stood at Rs 136 crore against Rs 146 crore, respectively. Over the medium term, the ability of the bank to manage asset quality (including that of the restructured book) and gradually restore earnings profile will remain key rating sensitivity factors.

 

Gross advances stood at Rs 4,206 crore and Rs 4,470 crore in fiscal 2021 and the first-half of fiscal 2022, respectively, reporting a year-on-year growth of 12% and 19%, respectively. The bank operations continue to remain highly concentrated, with microfinance accounting for 68% of the overall advances and the balance 32% comprising home loans, commercial vehicle loans, and loan against property. Despite gradually including non-microfinance products, its share in the total advances remains low, and ability to profitably scale up this portfolio will remain a monitorable over the medium term.

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

On March 26, 2021, the bank raised Rs 522 crore through its IPO, which further strengthened capitalisation: tier-1 capital was 47.2% and overall CAR stood at 51.5%, as on March 31, 2021 (34.3% and 35.4%, respectively, as on March 31, 2020). As on September 30, 2021, tier-1 capital and CAR stood at 41.8% and 45.9%, respectively. 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. The CAR is likely to be healthy at above 25% while gearing should remain below 4 times, over the medium term.

 

• Displayed ability to ramp-up retail term deposit franchise

In the four and a half years of banking operations, deposit base registered steady growth alongside an increasing share of retail deposits as a proportion of total deposits, and of overall external liabilities as well. Deposit base grew 14% in fiscal 2021 to Rs 3,256 crore (accounts for 66% of the total external liabilities). Over the course of this growth, the share of retail deposits (savings and retail term deposit of ticket size under Rs 2 crore) increased to 73.5% as of March 2021 from 50.3% in March 2020. In the first-half of fiscal 2022, retail deposit further grew to 83% with total deposit at Rs 3,128 crore. Moreover, over 97% 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 47.6% in September 2021 from 33.7% in September 2020. Based on the tenure of data, as on June 30, 2020, 49% of the term deposits was for a period exceeding a year. This helps contain the risk of unexpected reduction in deposit base.

 

• 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:

• Weakened earning profile owing to higher credit cost

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 bank.

 

However, earnings were affected in fiscal 2021 due to interest reversal on account of NPA, 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 the first-half of 2022 due to higher credit cost: the bank incurred loss of Rs 50 crore against profit of Rs 54 crore in the first-half of 2021. On the other hand, pre-provisioning profit remained stable at Rs 136 crore against Rs 146 crore. However, the bank reported higher credit cost of 6.2% (annualised) compared with 1.7%. Owing to asset quality challenges arising from the pandemic, the visibility around ultimate credit cost will likely come towards the end of fiscal 2022 and will be a key rating sensitivity factor.

 

• Low, though increasing, share of CASA in overall liability profile and relatively higher cost of deposits

On September 30, 2021, CASA formed 18.5% of total deposit base (15.4% as of March 2021) and 12% of total external liabilities (10.2%), which is towards the lower end of the range observed for most other SFBs. As on September 30, 2021, about 82% of the total deposits were from term deposits. Bulk deposit accounted for 12.1% of the total deposit. However, over 97% of the bulk deposit are non-callable in nature.

 

The bank’s cost of funds, though having declined, has remained high at 7.4% as on September 30, 2021 (8.1% as of March 2021). Ability to increase CASA deposits and reduce overall cost of funds will be a key monitorable.

 

• Ability to maintain asset quality performance and control credit losses in the near term remains a monitorable

Asset quality deteriorated in fiscal 2021 owing to the pandemic. The spread of coronavirus has disrupted the cash flows and repayment capabilities of several borrowers. As of March 2021, GNPA and NNPA stood at 9.4% and 4.7%, respectively; against 2.8% and 0.6%, respectively, in March 2020. This was further affected by the second wave of the pandemic, and stood at 10.2% and 4.5%, respectively, in the first-half of 2022; the provisioning coverage ratio stood at 59%. Additionally, the bank’s restructured portfolio stood at Rs 793 crore (17.7% of the AUM [assets under management] as on September 30, 2021). Of this, 14% of the loans are classified as standard and the remaining 3.7% are NPA. However, over 60% of these customers have paid their EMIs for September and October.

 

Though strong capitalisation mitigates the effects of deterioration in asset quality metrics, revival to pre-pandemic 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 (68% in the first-half of 2022) of the portfolio 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 economic growth picks up, ability of the bank to reinstate repayment discipline among customers will be a key monitorable.

 

As far as the non-microfinance segment is concerned (accounts for 32% of the AUM), the bank’s track record is limited, with low vintage in divisions such as commercial vehicle loan, home loans, and loan against property. Despite gradual expansion into non-microfinance products in recent years, its share in the total AUM remains low. The overall portfolio is distributed across Maharashtra (32.9% of overall portfolio as on September 30, 2021), Tamil Nadu (23.4%), Odisha (14.2%), Gujarat (9.0%), Karnataka (7.1%) and Madhya Pradesh (6.3%); presence is lower 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 261% as on June 30, 2021, on daily average basis for the respective quarter. The management has maintained very high liquidity during this period, with statutory liquidity ratio of 22% as of September 2021. The bank also has access to refinancing lines from National Bank for Agriculture and Rural Development and Small Industries Development Bank of India.

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 30% 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 2021, Suryoday SFB had operations across 13 states and Union Territories, catering to over 16 lakh customers through 560 branches. The loan AUM stood at Rs 4,470 crore as on September 30, 2021. The bank also had outstanding deposits aggregating Rs 3,129 crore.

Key Financial Indicators

Particulars for the period-ended	Unit	H1 2022	Mar-21	Mar-20	Mar-2019	Mar-2018
Total assets	Rs. Cr CrCr.	6,649	6,712	5,435	3761	2,156
Total income	Rs. Cr CrCr.	506	876	854	597	325
PAT	Rs. Cr	(50)	12	111	90	12
Gross NPA	%	10.2	9.4	2.8	1.8	3.5
Overall CAR	%	45.9	51.5	29.5	36.0	37.9
Tier-I Capital	%	41.8	47.2	28.6	33.7	34.8
Return on assets @	%	(1.5)	0.2	2.5	3.1	0.7

@Annualised for H1 2022

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Nature of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs Cr)	Complexity Level	Rating Assigned
NA	Certificate of Deposits	NA	NA	7-365 days	130	Simple	CRISIL A1+