Crisil reaffirms ratings on four SFB licence winners

Credit Ratings has reaffirmed its ratings on four non-bank firms that have received licences from RBI to run as small finance banks (SFBs), saying they are well positioned to manage path to transformation without impairing their credit profiles.
The four firms are: Au Financiers India, Equitas Finance, Janalakshmi Financial Services, and Ujjivan Financial Services.
These four companies are among 10 entities which have been granted in-principle approval by the RBI to set up small finance banks.
"Crisil has reaffirmed its ratings on four entities as they are well positioned to manage path to transformation without impairing their credit profiles," the rating agency said in a release.

The agency also said that the non-bank companies that received RBI nod to run as small finance banks (SFBs) will enjoy "structural benefits of scalability and diversified products by venturing into working capital financing and inclusion adjacencies such as affordable housing and enterprise financing".
Crucially, transformation will also provide non-bank companies access to stable and granular public deposits, the report said.

For microfinance institutions (MFIs) converting into SFBs, political and regulatory uncertainties will diminish.
However, Crisil said they will need to overcome three key challenges of increasing domestic shareholding to meet the RBI regulations, build their funding profile as an SFB, and overcome an expected fall in profitability in the initial years after transformation.

"Ability to raise a significant amount of equity from domestic investors over the next few quarters will be crucial, and will determine the trajectory of credit profiles over the medium term.
"This will not only lower foreign shareholding but also allow them to mitigate funding challenges. Higher net worth will enable two things -- access to more funds through inter-bank liabilities, and maintain strong capitalisation in the initial years, which will help offset fall in profitability," Crisil Ratings Chief Analytical Officer Pawan Agrawal said.
Further, the ability of SFBs to develop a deposit franchise to support growth and fund statutory liquidity ratio and cash reserve ratio requirements will also be a challenge given intense competition.

"Moreover, once they convert, SFBs will have limited access to bank loans as inter-bank liabilities would be capped at two times net worth."
At present, bank funding forms a significant proportion of their borrowings.
Crisil also upgraded its ratings on two entities -- Au Housing Finance Ltd and Equitas Housing Finance Ltd.