| 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 the 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, strong financial risk profile supported by adequate capitalisation and healthy revival in profitability and improving asset quality. 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 2023 to 33% (20% for fiscal 2022 and 7% for fiscal 2021), driven by restoration in ground level activities and pent-up demand. This momentum sustained over the first half of fiscal 2024 during which the bank’s AUM grew at 10% (year-to-date) to reach Rs 26,574 crore as of September 30, 2023. Over this period, the share of micro-banking portfolio (group loans, individual loans and rural loans) in the overall AUM also increased from 69% on September 30, 2022 to 72% as of September 30, 2023. As on December 31, 2023, the overall AUM is estimated to be Rs 27,791 crore (provisional), marking a provisional year-to-date growth of 15%.
Alongside this growth, asset quality has also restored reflected in gross non-performing assets (GNPA) and net non-performing assets (NNPA) of 2.2% and 0.09% as of September 30, 2023, respectively after peaking at 11.8% and 3.3% in September 2021. As on December 31, 2023, GNPA stood at 2.1% (provisional). Aside from asset quality, profitability has also revived evidenced by a return on managed assets (RoMA) of 3.7% for fiscal 2023 as against a loss reported for fiscal 2022 due to elevated credit costs. For the first half of fiscal 2024, RoMA remained healthy at 3.4% (annualised). In terms of capitalisation, the bank reported an adequate tier I and overall CAR of 22.5% and 25.2%, respectively, as on September 30, 2023.
On the liability side, the ramp up has continued with a 14% growth in deposit base over H1 FY 2024. As on September 30, 2023, the bank’s total deposit base was Rs 29,139 crore which constituted 88.6% of the external liabilities (Borrowings + Deposits). Retail deposits (retail term deposits [TDs] + CASA) formed 64.6 and CASA, 24.1% of the total deposits. As on December 31, 2023, deposits stood at Rs 29,869 crore and CASA ratio was 25.3% on a provisional basis. |
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, additional benefits to accrue on account of gradual diversification across secured asset segments Ujjivan SFB, the third largest small finance bank in the country, benefits from its strong presence and longstanding track record of over two decades in the microfinance space in India. Of the total portfolio, 72% constituted micro-banking loans (group, individual and rural loans). Within this, group loans under Joint Loan Group (JLG) model were 57% (of the AUM) whereas another 15% comprised of individual loans to microfinance borrowers who have had a long association with the bank. Following the pandemic outbreak, growth in micro-banking portfolio declined to a two year average of 6.5% for fiscal 2021 and 2022. However, a faster relaxation in lockdown thereafter and pent-up demand for credit led to a steep increase in disbursements in the subsequent period, yielding an annual growth of 33% in fiscal 2023. This was followed by a six monthly growth of 10% for the period ended September 30, 2023.
Considering over two-thirds of the bank’s portfolio comprises micro-banking loans (group loans, individual loans and agriculture loans) which makes the portfolio susceptible to socio-economic adversities, Ujjivan SFB has been strategically intending to reduce its exposure to this segment so as to curtail it at 50% levels in the long run. As on September 30, 2023, aside from 72% of micro banking portfolio, 15% of the AUM comprised of affordable housing loans followed by SME loans accounting for 5%. Other segments include vehicle loan, gold loan, personal loan, staff loan etc (7% of the AUM). Over the medium term, while microfinance shall continue to form the dominant share of the loan portfolio, the bank plans to focus on scaling its affordable housing and SME books. 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.
The operational presence of Ujjivan SFB remains geographically well diversified. In its portfolio, no state accounts for more than 15% of the total loan book. As on September 30, 2023, top 4 states for the bank’s portfolio were – Karnataka (13%), Maharashtra (9%), Tamil Nadu (15%) and West Bengal (12%). The bank’s established presence in the microfinance space has helped it in diversifying into adjacent segments, such as micro and small enterprise loans and micro-LAP (loan against property) financing.
Financial risk profile remains strong supported by adequate capitalization and healthy revival in profitability Ujjivan SFB’s capital position is adequate reflected in a Tier I and overall capital adequacy ratio of 22.5% and 25.2%, respectively, on September 30, 2023. Networth as on the same date was reported to be Rs 4,771 crore.
After remaining modest in the aftermath of Covid-19 due to credit quality challenges, profitability revived in fiscal 2023. For fiscal 2022, as credit costs elevated to 4.6%, the bank reported a net loss of Rs 415 crore. However, as the situation restored leading to stabilization of net interest margins (NIMs), higher recoveries and reduction in credit costs, the bank’s overall earnings profile revived with a profit of Rs 1,100 crore for fiscal 2023, corresponding to a RoMA of 3.7%. For the first half of 2024, the bank reported a profit of Rs 652 crore, translating to a RoMA of 3.4% (annualized). Pre-provisioning profit (PPOP) was Rs 941 crore for first six months of fiscal 2024 higher than Rs 686 crore reported for the corresponding period last fiscal. This improvement was a factor of higher other income and lower operating expenses. For full year fiscal 2023, PPOP was at Rs 1,485 crore as compared to Rs 591 crore for fiscal 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 September 30, 2023 –provision coverage ratio (PCR) was 96.1%. Additionally, the bank has total floating provisions of Rs 250 crore, out of which Rs 120 crore has been utilized as a buffer in PCR calculation, Rs 30 crore has been moved to tier II capital with prior approval from RBI and Rs 100 crore is shown under other provisions.
Over the medium term, the bank’s capitalisation is expected to remain adequate supported by stable accretions to networth. Its ability to profitably scale up the non-microfinance portfolios while maintaining sound asset quality and earnings profile, remains a monitorable.
Improvement in asset quality After remaining volatile during the Covid-19 overhang for most of fiscal 2021 and 2022, the bank’s asset quality has restored to GNPA and NNPA levels of 2.2% and 0.09% as of September 30, 2023 after peaking at 11.8% and 3.3% as of September 30, 2021. This improvement was a factor of increasing resolution, accelerated write offs and growth in AUM over the last two fiscals. The bank’s NNPA has remained sub 1% over the past 6-8 quarters owing to its philosophy of maintaining a high PCR on a steady state basis. Since fiscal 2022, the bank has consistently maintained a PCR of above 90%. Additionally, the bank has total floating provisions of Rs 250 crore, out of which Rs 120 crore has been utilized as a buffer in PCR calculation, Rs 30 crore has been moved to tier II capital with prior approval from RBI and Rs 100 crore is shown under other provisions.
This improvement in asset quality was also reflected in monthly collection efficiency which improved to 99% in terms of current collections and 111% in terms of overall collections for September 2023 after declining to 5% in April 2020 due to lockdowns. As on September 30, 2023, the bank had a restructured portfolio of Rs 146 crore with ~Rs 107 crore being in NPA bucket and almost fully provided for.
As the bank continues to scale its non-micro-banking portfolio, its ability to sustain asset quality at above average levels 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, its ability to insulate its overall asset quality from macro disruptions remains critical.
Weaknesses: Small, though increasing, share of CASA and retail deposits in overall 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 64.6% of total deposits as on September 30, 2023. CASA, though higher than its earlier positions, remains modest than banking peers at 24.1% on the same date (25.3% as on December 31, 2023 on provisional basis). The proportion of institutional deposits has declined to 34.4% as of September 30, 2023 from 36.6% as on March 31, 2022. 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.
In terms of liability maturity profile, initially, the bank initially relied heavily 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 34.4% in September 2023. Cost of deposits increased to 7.4% in Q2 2024 from 6.2% in Q2 2023. Further, the bank has taken initiatives to increase the share of retail deposits. It has also been attempting to attract a higher share of low-cost savings accounts to attain a balanced mix between current accounts (CA) and savings accounts (SA).
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 group loans, individual loan and small ticket micro and small enterprise loans, typical borrowers are vegetable vendors, small machine and lathe owners, tea shops, provision stores, small fabrication units, wastepaper 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 remained stretched, thereby restricting their repayment capability. The bank had thereafter 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, the bank’s portfolio remains susceptible to these macro events and the impact of it on its borrowers’ credit profile and repayment capability. |
Liquidity: Strong Ujjivan SFB’s liquidity profile is comfortable. As of September 30, 2023, assets maturing over the following one year formed 1.02 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 fiscals, 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 (34.4%) and granular retail term deposits (40.2%). CASA, at 24% of the total deposit base as on September 30, 2023, has remained range bound over the last 3-6 quarters however, in comparison to peer SFBs and universal banks, it remains low.
Ujjivan SFB reported an excess statutory liquidity ratio of about 15.48% and a provisional liquidity coverage ratio (LCR) of 179% on November 30, 2023 and is expected to continue maintaining adequate buffer in liquidity coverage ratio (LCR). Moreover, Ujjivan as a SFB has access to systemic liquidity facilities such as liquidity adjustment facilities and call money market instruments which can be utilised 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.
ESG profile The Environment, Social, and Governance (ESG) profile of Ujjivan SFB supports its credit risk profile.
The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, lending decisions may have a bearing on the environment.
Ujjivan SFB has an ongoing focus on strengthening various aspects of its ESG profile.
Key ESG highlights:
There is growing importance of ESG among investors and lenders. Ujjivan SFB’s commitment to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to domestic and foreign capital markets. |
Rating Sensitivity factors Downward factors:
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About the Company 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 September 30, 2023, the bank had a branch network of 700 spread across 26 states.
The bank is currently in process of reverse merger with Ujjivan Financial Services, subject to necessary approvals. The shareholders’ approval for the same has been received. The merger was announced by the company on October 14,2022. |
Key Financial Indicators
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Any other information: Not Applicable |
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Annexure - Details of Instrument(s)
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Criteria Details
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