| Ujjivan Small Finance Bank Limited | ||
| Rating Reaffirmed | ||
| Rating Action | ||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||
| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on Rs 2,500 crore certificate of deposits programme of Ujjivan Small Finance Bank Limited (Ujjivan SFB).
The rating continues to reflect the strong presence of Ujjivan SFB in the microfinance business with gradual expansion into other asset classes, adequate capitalization and gradually restoring asset quality backed by sound systems and processes. These strengths are partially offset by the bank’s small, though growing, base of retail deposits and modest credit risk profile of majority of the borrowers.
Growth in assets under management (AUM) revived in fiscal 2022, to 20%, driven by restoration in ground level activities and pent-up demand. This momentum sustained over 9M 2023 during which the bank’s AUM grew at 21% (year-to-date) to reach Rs 21,895 crore as of December 31, 2022. Over this period, the share of micro-banking portfolio (JLG lending, individual loans and rural loans) in the overall AUM also increased from 67% on December 31, 2022 to 71% as of December 31, 2022.
Alongside this growth, asset quality also restored to GNPA and NNPA of 3.4% and 0.05% as of December 31, 2022, respectively after peaking at 11.8% and 3.3% in September 2021. Nonetheless, the bank’s provision cover on NPAs remains high at 98.5%. Aside from asset quality, profitability also revived to RoMA of 3.9% (annualized) after a loss was reported for fiscal 2022 due to elevated credit costs.
Nonetheless, the bank’s capital position remains adequate – reflected in a tier I and overall CAR of 22.8% and 26.0%, respectively, as on December 31, 2022.
On the liability side, the ramp up has continued evidenced by a robust 27% growth in deposit base over 9M 2023. As on December 31, 2022, the bank’s total deposit base was Rs 23,203 crore which constituted 90.9% of the external liabilities. Retail deposits (retail TD + CASA) formed 65.3% and CASA, 26.1% of the total deposits. |
Analytical Approach CRISIL has assessed the standalone credit risk profile of Ujjivan SFB in order to arrive at the rating. |
Key Rating Drivers & Detailed Description Strengths: Established market position in the microfinance space, additionally benefiting from its bank status which allows diversification and scalability Ujjivan SFB, the third largest small finance bank in the country, benefits from its strong presence and longstanding track record of 20 years in the microfinance space in India. Of the total portfolio, 71% constituted micro-banking loans (group, individual and agri), which corresponded to a market share of close to 3-5% in the microfinance space in India. Within this, group loans under JLG model were 59% (of the AUM) whereas balance were individual loans to microfinance borrowers with long association history with the bank. Following the pandemic outbreak, the growth in micro-banking portfolio was constrained to 9% in fiscal 2021. This momentum was again impacted by the second wave resulting in a muted Q1 2022. However, a faster relaxation in lockdown thereafter and pent-up demand for credit resulted in a steep increase in disbursements in the latter half of the fiscal, yielding an annual growth of 20% followed by a nine monthly growth of 21% for fiscal 2023.
Considering almost two third of the bank’s portfolio comprises microfinance loans (group loans, individual loans and agriculture loans) which are susceptible to socio-economic adversities, the bank has been strategically intending to reduce its exposure to this segment so as to curtail it at 50% levels in the long run. The presence of Ujjivan SFB in the microfinance space is geographically well diversified. In its portfolio, no state accounts for more than 15% of the total loan book, which has been a positive aspect for portfolio quality. In terms of concentration, top 4 states for the bank’s portfolio are – Karnataka (13%), Maharashtra (9%), Tamil Nadu (15%) and West Bengal (12%). Presence in the microfinance institution space helps expansion of portfolio in adjacencies, such as micro and small enterprise loans and housing finance. Moreover, exposure to political and regulatory uncertainties associated with the microfinance sector would diminish gradually as the bank increases its scale in the non-microfinance business wherein the target customers are relatively more affluent.
As on December 31, 2022, aside from 71% of micro banking portfolio, 14% of the AUM comprised affordable housing loans followed by SME loans accounting for 8%.
Financial risk profile remains strong supported by adequate capitalization and reviving profitability Ujjivan’s capital position is adequate reflected in a tier I and overall capital adequacy ratio of 22.8% and 26.02%, respectively, on December 31, 2022. Networth as on the same date was reported to be Rs 4,064 crore. Owing to elevated credit costs of 4.6%, the company reported a net loss of Rs 415 crore for fiscal 2022. However, with increase in write backs and recoveries and correction in asset quality, the bank’s overall earnings profile restored evidenced by a nine monthly profit of Rs 790 crore corresponding to a RoMA of 3.9% (annualized). Net interest margins also widened due to restoration in asset quality, resulting in higher pre-provisioning profit of Rs 1074 crore for 9M 2023 as compared to Rs 395 crore for 9M 2022.
Despite the profitability constraints in the recent past, the bank has retained its conservative provisioning policy whereby it maintains a minimum of 75% provisioning coverage on NPAs. As on December 31, 2022 – PCR was 98.5%. As the company diversifies across non-microfinance segments, its ability to profitably scale the portfolio will remain a key monitorable.
Gradually restoring asset quality backed by sound risk management systems and processes After remaining volatile during the Covid-19 overhang for most of fiscal 2021 and 2022, the bank’s asset quality has started to restore – reflected in GNPAs and NNPAs correcting to 3.4% and 0.05% as of December 31, 2022 after peaking at 11.8% and 3.3% as of September 30, 2021. This improvement was a factor of robust growth in AUM and increasing resolution in delinquencies.
Given 93% of the company’s portfolio comprised microfinance, housing loans and SME loans as of December 2022, the disruption in salary income and cash inflows of the borrowers in these segments hindered their repayment capacity. After the first wave, overall monthly collections dipped to as low as 5% in April 2020. Thereafter, as the macro situation stabilized, collections also improved – reaching 100% in terms of current collections and 115% in terms of overall collections for December 2022.
Since March 2020, the bank’s provisioning coverage ratio on NPAs has consistently remained >70% (except on March 31, 2021) and stood at 98.5% as on December 31, 2022. As on the same date, restructured portfolio stood at Rs 302.4 crore and it had a provision cover of 63.7% with majority being deployed against NPA.
In the medium term as the bank is scaling across segments after a lull period, the ability of the bank to sustain improvement in its asset quality remains a key rating sensitivity factor. In addition, given the bank’s target market has a major composition of customers with below average credit risk profile, the ability to reinstate credit discipline within this segment will remain critical.
Ujjivan SFB continues to have an independent credit vertical for sanctioning loans. The credit team also administers ground-level processes followed by the sales team. Credit bureau verification and internal deduplication are conducted centrally. Ujjivan has a strong independent internal control and audit function for conducting frequent audits of its branches. It has implemented technology solutions for managing liabilities and other banking functions such as treasury, risk management, and compliance. Its systems and processes should enable the bank to revive asset quality in the microfinance business to pre-Covid levels, over the near to medium term. However, ability to replicate sound systems and processes for small and micro enterprise loan, home loan, and home improvement loan segments as they scale, is to be demonstrated.
Weaknesses: Lower than peer, though increasing CASA and retail deposit base While the share of retail deposits (CASA and retail term deposits of ticket size < Rs 2 crore) has been gradually increasing, it still remains relatively smaller than other banks, at 65.3% of total deposits as on December 31, 2022. CASA, though higher than its earlier positions, remains lower than banking peers at 26.1%. The proportion of institutional deposits has declined to 33.8% as of December 31, 2022 from 37.0%, a year ago.
The bank's focus on mobilization of deposits increased fiscal 2019 onwards since most of fiscal 2018, after its banking transition, was spent in overcoming demonetization related challenges apart from completing the process of transformation to banking platform. This led to a lagged pick up in the deposit franchise and thus, the base of retail deposits including CASA, is low.
Initially, the bank’s reliance was largely on shorter tenure bulk products like CDs and institutional deposits. However, as banking operations stabilized and efforts were made establish the liability franchise, the share of bulk/ wholesale deposits reduced from 89.4% in December 2017 to merely 33.8% now. This increase is also a factor of marginal increase in cost of deposits from 6.1% in Q3 2022 to 6.5% in Q3 2023. Simultaneously, the bank has also replaced its short-term deposits with longer tenure ones thereby strengthening its ALM in the process.
Modest credit risk profile of borrowers A significant portion of the portfolio comprises microfinance loans to clients with below-average credit risk profiles and lack of access to formal credit. For instance, in the individual loan and micro and small enterprise loans, typical borrowers are vegetable vendors, small machine and lathe owners, tea shops, provision stores, small fabrication units, waste paper recycling units, tailors, and power looms. These customers belong to the semi-skilled self-employed category, and their income flow could be volatile and dependent on the local economy. With the slowdown in economic activity after the lockdown, the cash flows for such borrowers have been stretched, thereby restricting their repayment capability. The bank has identified the more impacted customers from this segment and restructured their loans in the third quarter of fiscal 2021.
At an overall level, while collections have revived to pre-Covid levels, though Ujjivan SFB’s ability to reinstate repayment discipline among its customers will be a monitorable. |
Liquidity: Strong Ujjivan’s liquidity profile is comfortable owing to the bank’s microfinance focused business model which allows it to operate at a positively mismatched asset liability maturity profile. On December 31, 2022, assets maturing over the next one year was at 1.12 times that of liabilities maturing over the same period, with no negative cumulative mismatches in time buckets over a 1-year period.
Over the last 2-3 years, the bank’s high reliance on Certificate of Deposits (CDs) – which formed 57% of total deposit base on December 31, 2018, has also declined to sub 5% being replaced by slightly longer tenure institutional term deposits (33.8%) and granular retail term deposits (39.2%). CASA, at 26.1% of the total deposit base, has remained range bound over the last 3-6 quarters however, in comparison to peer SFBs and universal banks, it remains low.
Ujjivan reported an excess SLR of about 15.48% and a provisional LCR of 198% on December 31, 2022 and is expected to continue maintaining adequate buffer in liquidity coverage ratio (LCR), sufficient cash and bank balance, unutilised bank facilities, and refinance lines from financial institutions to meet outflow over the next 12 months.
Moreover, Ujjivan as a SFB has access to systemic liquidity facilities such as liquidity adjustment facilities and call money market instruments which can be utilized if need be. Apart from that, the bank parks funds in liquid mutual funds and has sanctioned lines from development banks which can also be utilized. |
Rating Sensitivity Factors Downward Factors: * Lack of improvement in asset quality resulting in profitability remaining constrained for a prolonged duration, pressure on capitalization * Inability to garner retail deposits leading to reduction in the share of retail term deposits in the total deposit base to below 30% for a prolonged time |
About the Bank Ujjivan SFB is the third largest small finance bank in the country. It commenced its SFB operations in February 2017 by transfer of assets and liabilities of Ujjivan Financial Services Limited (Ujjivan Financial Services). The holding entity, Ujjivan Financial Services was set up in 2005 by Mr Samit Ghosh, focused on the urban sector. As on December 31, 2022, the bank had a branch network of 598 spread across 25 states. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Criteria Details
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