NPAs peaked few quarters back: Rajeev Yadav, MD & CEO Fincare SFB

In a Q&A, he explains that his outfit is tapping the capital market both due to regulatory requirements and to fund growth

Fincare Small Finance Bank revived its plans to hit the capital market and has now refiled IPO papers with the market regulator. In an interview with Manojit Saha, Rajeev Yadav, MD & CEO Fincare Small Finance Bank says his firm is tapping the capital market both due to regulatory requirements and to fund growth. Edited excerpts:

In August, Fincare SFB refiled the IPO papers with Sebi. When are you planning to come up with the offering?

We will try and work within the validity period of the approval, which is typically one year from the formal approval date.

Is the IPO being floated to meet regulatory requirements on listing or is it to fund business growth?

It is a combination of both. We clearly have a regulatory deadline and the process is designed for regulatory compliance. As it would normally happen for a bank of our size, it is fair to make it public for a larger, diversified shareholding and raising incremental capital for the growth of the bank.

The capital adequacy ratio was far above the regulatory requirement…

For a fast growing institution like ourselves as you can see within Covid also we had a 25 per cent growth last year and prior to Covid it was even higher. So even as 22 per cent capital adequacy ratio is sufficient, the bank will always need capital to keep pace with its growth ambition.

You faced certain challenges in FY22 when net profit fell to Rs 5 crore from Rs 146 crore the previous year. The credit cost was high at 4 per cent, gross NPA was 7.8 per cent as of March 2022. Are there any visible changes on those parameters in the current financial year?

The pros of the financial inclusion space is that there is a huge untapped market that is under-banked and unbanked, so there is a huge opportunity. However, the cons is that Covid had significantly impacted that segment. There is a significant nature of unsecured loans. So the delinquencies got elevated during the Covid time. Yes, the bank had elevated NPAs but they all peaked a few quarters back. In pre-Covid, the bank’s gross NPA was under 1 per cent, and net NPA 0.5 per cent. Once the Covid impact on the portfolio eases up, as the industry is seeing at  this point of time, we should come back to net NPA and gross NPA numbers although we should be broadly ready for slightly different portfolio behaviour given a difficult time. As the Crisil and Icra reports indicate FY23 to be much more profitable for these industries, and NPA numbers clearly will be much lower.

Are the collections back to pre-covid levels?

Clearly the industry has started seeing collection efficiency rising nearly to pre-Covid levels. The impact of the crisis in some of our portfolios is typically 3-6 months after the crisis. The last impact on the portfolio was during the second wave of Covid in April-June of 2021. So the worst impact of that would flow during the July-December period of 2021. Then it broadly normalises to a reasonable pre-impact period. But in that phase of a crisis, some customers may become delinquent. What we incrementally built after that tends to behave like pre-crisis collection efficiency. The year 2022 is in that direction of near normalisation of the non-delinquent pool of customers.

Micro finance institutions that converted to SFBs have their loan portfolios heavily tilted towards micro loans even after 5-6 years of operations and Fincare is no exception. How do you plan to diversify?

As of March 2022, our diversification was 25 per cent. In the larger context, the bank has a phase that we call the 'built' of the bank. The most important 'built' in that phase is the deposit franchise, because we did not have any deposits earlier. The second important 'built' is technology. The third is compliance, governance – all the nitty gritty that runs a bank. Loan assets are one part of it. And clearly on loan assets we have expertise on a product prior to the launch and one or two products which were in the secured category at the time of launch like mortgage loans and gold loans. So in the first five years you are trying to build the remaining portion of banks, and also you are trying to diversify but we have to be careful because we are in a world where these customers are untested customers, we have to be conscious of the credit risk we take. Diversification is necessary for a bank over a period of time but has to be done in a calibrated manner. So, from virtually 5%  of the balance sheet which was not microfinance when we started as a bank, and the balance sheet is also growing…so on a fast growing balance sheet diversification as a percentage is more challenging.