High provisioning, NPA hit SFBs profitability

Illustration by Ajay Mohanty

Newly-opened small finance banks (SFB) had a rough start, as many of them saw a decline in profitability and losses in the second quarter of the present financial year, due to stressed microcredit accounts.

Many SFBs had to keep aside a substantially high amount of money as provisions due to non-recovery of loans. On account of to the twin impact of demonetisation and rumours of debt waiver, the industry saw non-performing assets increase to more than 5-6 per cent, against about one per cent prior to demonetisation.

Ujjivan Financial Services, the holding firm for Ujjivan Small Finance Bank posted a net loss of Rs 12 crore in the second quarter of the present financial year, against a net profit of Rs 73 crore in the corresponding period last financial year. In the first quarter of this financial year too, the bank had posted a net loss of about Rs 75 crore. The bank had to make a provision of about Rs 88 crore in the last quarter on account of bad loans.

Another listed SFB, Equitas Holding Ltd reported second-quarter net profit down by 76 per cent to Rs 10.91 crore from Rs 46.34 crore last year, mostly on account of higher provisioning for bad loans.

Ujjivan, Equitas and AU Small Finance Bank are the three listed small finance banks. AU Small Finance Bank had posted a net profit of about Rs 68 crore, against Rs 70 crore in the same period last year.

Fincare Small Finance Bank too suffered a loss in the first six months of the present financial year due to high provisions, said Rajeev Yadav, chief executive, Fincare.

"Most of the decline in profitability in the industry is due to provisions for microcredit portfolios impacted due to demonetisation. We have made a one-time provision, which led to the loss. We have provided for 3-4 per cent of our portfolio this time," said Yadav.

In the first half of the present financial year Suryoday Small Finance Bank managed to have a profit of about Rs 4.7 crore, but it was lower than last year's profit the same period. This year the bank would need to provide close to Rs 50 crore towards non-recovery of dues. This apart, it might have to provide close to Rs 10-15 crore in the first quarter of the next financial year, said R Baskar Babu, MD and CEO, Suryoday Small Finance Bank.

"The main reasons behind low profitability are marginal growth in portfolio and reduction in interest on account of NPAs. We hope to fully provide for NPAs by the end of this year. However, we might require some amount in the first quarter of the next financial year too," said Babu.

Kerala-based ESAF Microfinance too saw a reduction in net profit last quarter. However, the bank had already provided for a bulk of NPAs in the first quarter itself, said K Paul Thomas, Managing Director and CEO, ESAF Small Finance Bank.

One of the biggest blow for microlending came last December with demonetisation and the debt waiver scheme. Many regular borrowers in states like Uttar Pradesh, Maharashtra, Madhya Pradesh, Uttarakhand, Karnataka stopped repayments, and from about 99 per cent, it came down to around 84 per cent. According to the latest data available from MFIN, at the end Q1 of FY 17-18, for NBFC MFIs the portfolio at risk (PAR) at more than 30 days is still high at 7.46 per cent, against 0.32 per cent in the same quarter in 2016-17.

As of Q1 of FY17-18, SFBs had about 17.3 million loan accounts with a total loan outstanding of Rs 28,634 crore under micro-credit.

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