Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on Rs 2,500 crore certificate of deposits programme of Ujjivan Small Finance Bank Ltd (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 sound systems and processes. These strengths are partially offset by the bank’s small, though growing, base of retail deposits, vulnerable asset quality and modest credit risk profile of majority of the borrowers.

 

In lieu of the slowdown imposed by the pandemic, the bank’s assets under management (AUM) grew at a muted 7% over fiscal 2021 and reached Rs 15,140 crore as on March 31, 2021. The revival in the second half of fiscal 2021 which contributed to the annual growth was disrupted by the second wave resulting in another slowdown in Q1 2022. However, once the restrictions were uplifted and the economy started to restore, the bank resumed its field activities.

 

Driven by pent up demand across asset classes resulting in high disbursements for Q2 and Q3 2022, the bank’s AUM registered a nine monthly growth of 9% to reach Rs 16,463 crore as on December 31, 2021. Over this period, the share of micro-banking portfolio (JLG lending, individual loans and rural loans) in the overall AUM declined from 72% to 67%.

 

Pro-forma gross non-performing assets (GNPAs) of Ujjivan SFB surged to 11.8% by the end of September 30, 2021, after having remained sub 1% prior to Covid outbreak. Among all the asset classed the bank operates in, micro-banking, MSE and vehicle loans exhibited the weakest performance. Subsequently, in Q3 2022, improvement in borrowers’ cash flows stimulated higher resolution across delinquency buckets. Resultantly, collection efficiency – which had dipped to 72% in May 2021, improved to 97% in December 2021 and remained at this level in January 2022. On December 31, 2021, the bank reported a GNPA of 9.8% and its NPA stood at 1.7% - reflecting a high provisioning coverage ratio of 84%. The bank has restructured Rs 1798 crore cumulatively under scheme I and II and total restructured portfolio outstanding as on December 31, 2021, was Rs 1239 crore. For majority of this portfolio, regular billing has commenced in Q3 2022 and for December 2021, the collection efficiency of the restructured pool was 80%.

 

Owing to the bank’s philosophy of maintaining a high PCR on its stressed assets (pro-forma GNPA, restructured portfolio and a contingency provision), its profitability has moderated. For fiscal 2021, the bank reported a modest RoMA of 0.04% constrained by elevated credit costs of 4.1%. For 9M 2022, credit costs inched up further to 5.9% (annualized) on account of additional slippages after the second wave. This resulted in a nine monthly loss of Rs 541 crore corresponding to a RoMA of -3.5%. Since March 2020, the bank’s pre-provisioning profitability has also remained subdued owing to higher interest reversals.

 

Nonetheless, the bank’s capital position remains adequate – reflected in a tier I and overall CAR of 17.7% and 19.0%, respectively, as on December 31, 2021. CRISIL Ratings has taken note of the bank’s plans to raise Rs 600 crore via QIP before December 2022 in order to increase the public shareholding in the bank from 16% to 25%, and believes that this would further strengthen the networth base of Ujjivan SFB.

 

On the liability side, the ramp up has continued evidenced by a robust 22% growth in deposit base over fiscal 2021 and another 18% nine monthly growth over 9M 2022. As on December 31, 2022, the bank’s total deposit base was Rs 15,563 crore which constituted 89% of the external liabilities. Retail deposits (retail TD + CASA) formed 61% and CASA, 26.5% of the total deposits.

Analytical Approach

CRISIL Ratings 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 18 years in the microfinance space in India. Of the total portfolio, 67% constituted micro-banking loans, which corresponded to a market share of close to 4% in the microfinance space in India. Within this, group loans under JLG model were 55% (of the AUM) whereas balance were individual loans to microfinance borrowers with long association history with the bank. 

For fiscal 2021, the growth in micro-banking portfolio was constrained due to the pandemic and following disruptions. 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 Q2 and Q3 2022, yielding a nine monthly growth of 9% in AUM which stood at Rs 16463 crore as on December 31, 2021.

Considering almost two third of the bank’s portfolio comprises microfinance loans (group loans, individual loans and agriculture loans) which is susceptible to socio-economic adversities, the bank has been strategically reducing 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 16% of the total loan book, which has been a positive aspect for portfolio quality. With respect to pockets of Assam, West Bengal, Maharashtra, Punjab and Tamil Nadu (around 42% exposure) which have exhibited weaker asset quality performance than other states over the last 4-8 quarters, improvement has happened in the last 4-5 months of calendar year 2021. However, as far as incremental growth in these states is concerned, the bank remains watchful and is expected to refrain from increasing its micro loans exposure therein for some time

 

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, 2021, aside from 67% of micro banking portfolio, 16% of the AUM comprised housing loans followed by SME loans accounting for 10%.

Financial risk profile remains strong supported by adequate capitalization, though profitability, which has moderated due to additional provisioning, remains a monitorable.

Ujjivan’s capital position is adequate reflected in a tier I and overall capital adequacy ratio of 17.7% and 19.1%, respectively, on December 31, 2021. Networth as on the same date was reported to be Rs 2,674 crore.

In the aftermath of the pandemic as asset quality deteriorated sharply, credit costs surged in addition to increased interest reversals. Resultantly, the bank’s operating and overall profitability both moderated and have remained modest ever since.

As against a net profit of Rs 350 crore and a RoMA of 2.2% for fiscal 2020, the bank reported a muted profit of Rs 8 crore and a RoMA of 0.04% for fiscal 2021. Credit costs for the year surged to 4.1% from 1.1% for the previous year. Due to legacy slippages after the first pandemic wave and additional impact of the second one, the bank reported a loss for each of the first three quarters of fiscal 2022 resulting in a cumulative nine monthly loss of Rs 541 crore as against a loss of Rs 128 crore for the corresponding period of the previous fiscal. RoMA for these periods were -3.5% and -0.9%, respectively. Credit cost for 9M 2022 was 5.9% as against 5.5% for 9M 2021.

Apart from high credit costs, net interest margins also thinned due to high reversals resulting in a low pre-provisioning profit of Rs 373 crore for 9M 2022 as compared to Rs 651 crore for 9M 2021.

However, the bank follows an advance provisioning policy which allows it to maintain a higher than peer provisioning coverage ratio. Over the last 4-6 quarters, the bank’s average PCR for the last 6 quarters was 76%.

Considering the gradual turn around in the last quarter reflected in increased recoveries and expanding NIMs, Ujjivan SFB’s operating and overall profitability is expected to restore gradually in the normal course of business, only over the medium to long term.

Sound risk management systems and processes

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.

 

Weakness:

Asset quality remains vulnerable despite early signs of improvement, traction in collection and recovery will be a key monitorable

The bank’s asset quality has remained volatile since the outbreak of the pandemic in March 2020. Its gross NPAs, which have historically remained within 2% in the normal course of business, elevated sharply after culmination of moratoria in September 2020 and peaked at 11.8% as of September 30, 2021. Net NPA as on September 30, 2021 stood at 3.3% whereas total stressed assets (including NPAs, restructured portfolio and write offs in H1 2022) were high at 22%.

Given 94% of the company’s portfolio comprised microfinance, housing loans and SME loans as of March 2020, 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 followed by revival to 105% in January 2021 (including foreclosures/ advance payments) – driven by increased overdue collections.

After the second wave, collection efficiency (including over dues, excluding advance collections) dipped to 71% in May 2021 however, as the macro situation restored and lockdown restrictions were relaxed, it improved to 95% in September 2021 and further to 97% in January 2022. Improvement in resolution across buckets resulted in a marginal reduction in NPAs to 9.8% (gross) and 1.7% (net) as of December 31, 2021. As on this date, total stressed assets accounted for 18% of the AUM.

Since March 2020, the bank’s provisioning coverage ratio on NPAs has consistently remained >70% (except on March 31, 2021) and stood at 84% as on December 31, 2021. As of this date, the bank was carrying Rs 1549 crore as provisions which formed 9.4% of its AUM. While gradual improvement in asset quality of the bank has commenced in Q3 2022, the ability of the bank to expedite this improvement so as to revive its muted profitability 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.

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 60.6% of total deposits as on December 31, 2021.  CASA, though higher than its earlier positions, remains lower than banking peers at 26.5%. The proportion of institutional deposits has declined to 37.0% as of December 31, 2021 from 41.8%, a year ago. Though, majority of reduction has happened over Q2, Q3 of fiscal 2022 and sustenance in this is yet to be demonstrated.

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 37% now. The benefit of this transition is also reflective in the declining cost of funds which were at 6.16% in Q3 2022 as compared to 7.14% for the corresponding quarter of the previous fiscal. 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 picked up since June 2020, the revival to pre-pandemic level is some distance away, and Ujjivan SFB’s ability to reinstate repayment discipline among its customers will be a monitorable.

Liquidity: Strong

Ujjivan’s liquidity profile is comfortable. On December 31, 2021, assets maturing over the next one year was at 1.04 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 (37%) and granular retail term deposits (34%).  CASA, at 26.5% of the total deposit base, has grown well 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 5% and an LCR of 139% on December 31, 2021, 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

Downside factors:

• Lack of improvement in asset quality resulting in profitability remaining weak for a prolonged duration, pressure on capitalization
• Inability to garner retail deposits leading to reduction in its share in the total deposit base to below 30% for a prolonged time.

About Ujjivan SFB

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, 2021, the bank had a branch network of 450+ spread across 24 states.

Key Financial Indicators

As on / for the period ended March 31		2021	2020	2019
Total assets	Rs crore	20,380	18.411	13742
Total income	Rs crore	3117	3,026	2038
Profit after tax	Rs crore	8	350	199
Gross NPA	%	7.1	1.0	0.9
Overall capital adequacy ratio	%	26.4	28.8	18.9
Return on assets	%	0.0	2.2	1.7

 

As on / for the period ended December 31		2021	2020	2019
Total assets	Rs crore	21,199	19,416	17,360
Total income	Rs crore	2205	2,377	2216
Profit after tax	Rs crore	(541)	(128)	277
Gross NPA	%	9.8	1.0 (4.8)^	0.9
Overall capital adequacy ratio	%	19	26.9	28.3
Return on assets	%	(3.5)	(0.9)	2.3

^pro-forma

Any other information: Not applicable