Bad loans of small finance banks may go up 70-80 bps by FY22-end

The gross non–performing assets (GNPAs) of small finance banks (SFBs) is expected to go up by 70–80 basis points (bps) by the end of the current financial year (FY22) compared to FY21 levels, an assessment by rating agency ICRA has suggested.

SFBs had seen their asset quality deteriorate post the second wave of Covid-19, in April-May of 2021, when the GNPAs went up to 6.4 per cent as of quarter 2 (Q2) of FY22 from 5 per cent at the end of FY21. While the gradual ramp up in collections has helped, the performance of the restructured portfolio remains monitorable, the rating agency has indicated.

On an overall basis, ICRA expects some reduction in GNPAs in the second-half of FY22.

Also, the risk profile of these banks remains relatively high, given it has a high proportion of unsecured loans. Lately, these lenders have forayed into retail asset classes such as vehicle loans, business loans, loan against property (LAP) and housing finance.

Meanwhile, the rating agency expects the asset under management (AUM) of the lenders to grow faster, at about 20 per cent in FY22, compared to 18 per cent growth in FY21. Although this would be lower compared to the compound annual growth rate (CAGR) of 30 per cent witnessed during FY16 and FY20.

The spike in Covid-19 cases has also meant that the recovery in this sector will get hampered. “ICRA maintains its cautious stance as the recent surge in Covid-19 infections could play a spoilsport and impact the recovery in growth”, the rating agency said.

Sachin Sachdeva, vice-president and sector head, financial sector ratings, ICRA, said, “Since disbursements have started picking up, we expect AUM growth to improve in the second-half of FY22, pushing the full-year AUM growth to around 20 per cent. The same, though, is subject to no major impact from the recent rise in Covid-19 infections.”

Sachdeva also said that credit costs of the SFBs are expected to remain elevated in FY22, which would keep the profitability subdued. Net interest margin of SFBs faced pressure in FY21, given the challenging operating environment and interest income reversal on delinquent accounts. Its operating profitability was supported by a reduction in its operating expenses.