| Suryoday 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 certificate of deposit programme of Suryoday Small Finance Bank Limited (Suryoday SFB).
The rating continues to reflect the strong capitalisation of the bank, ability to garner retail deposits, and extensive experience of the board and senior management. These strengths are partially offset by moderate earnings profile; weakened asset quality metrics; and modest credit risk profile of the borrowers with low seasoning of the non-microfinance business.
The bank’s assets under management (AUM) grew by 20% year on year in fiscal 2022 from Rs 4,206 crore as on March 2021 to Rs 5,063 crore as on March 31, 2022 Growth was driven by pent up demand across asset classes resulting in higher disbursements post second wave of Covid 19. In H1 2023, AUM grew at 6% year to date to Rs 5,378 crore. The bank’s operations continue to remain highly concentrated, with microfinance accounting for 64% of the overall advances and the balance 36% comprising home loans, commercial vehicle loans, and loan against property. Despite gradually including non-microfinance products, its share in the total advances remains low, and ability to profitably scale up this portfolio will remain a monitorable over the medium term.
The Bank has healthy capitalization with Tier I CAR and Total CAR) at 33.1% and 35.9%, respectively as of September 30, 2022. However, asset quality remains severely impacted by the pandemic. As a result, gross non-performing assets (GNPA) and net NPA (NNPA) remained weak at 9.9% and 4.8%, respectively, as of September 2022 as compared to 11.8% and 6.0%, respectively, as of March 2022. Additionally, bank has outstanding standard restructured portfolio of around Rs 185 crore as of September 2022 (3.4% of the AUM) billing for which has already started from July 2022 onwards. Given the sustained stress, higher provisioning impacted earnings with the bank posting a loss of Rs 93 crore in FY22. However, the Bank returned to profitability in 1H23, reporting a profit of Rs 21 crore in the first-half of the current fiscal against a loss of Rs 50 crore in first-half of the previous fiscal. Pre-provisioning operating profit also improved to Rs 173 crore in H1 2023 as compared to Rs 136 crore in H1 2022. Over the medium term, the ability of the bank to improve its asset quality and gradually restore earnings profile will remain key rating sensitivity factors.
On the liabilities side, the ramp up has continued evidenced by a robust 18% yoy growth in deposit base in fiscal 2022 and another 9% ytd in H1 2023. As on September 30, 2022, the bank’s total deposit base was Rs 4,207 crore which constituted 64% of external liabilities. Retail deposits (retail TD + CASA) formed 71% and CASA, 17.3% of the total deposits. |
Analytical Approach CRISIL Ratings has assessed the standalone credit risk profile of Suryoday SFB for arriving at its rating. |
Key Rating Drivers & Detailed Description Strengths:
Suryoday’s capital position remained strong reflected with Tier I and Total CAR of 33.1% and 35.9%, respectively as of Sep 2022 (34.4% and 37.9%, respectively, on March 31, 2022). Networth as on Sep 2022 was reported at Rs 1,527 crore. The bank raised fresh equity of Rs 248 crore through its IPO in March 2021 which strengthened its capitalization. Additionally, the bank has had adequate flexibility to raise capital in the past: it raised Rs 288 crore in fiscal 2017, Rs 25.6 crore in 2018, around Rs 248 crore of equity in 2019 and Rs 63 crore of equity in 2020. The CAR is likely to be healthy at above 25% while gearing should remain below 4 times, over the medium term.
The deposit base has registered steady growth since inception with an increasing share of retail deposits as a proportion of total deposits.. Deposits grew 18% in fiscal 2022 to Rs 3,850 crore (60% of total external liabilities). The share of retail deposits increased to 78% as of March 2022 from 50.3% in March 2020. In the first-half of fiscal 2023, the Bank had a deposit base of Rs 4,207 crore, of which 72% were retail deposits. Moreover, over 100% of the bank’s bulk deposit is non-callable in nature.
Granularity of deposits has also improved as the share of term deposit in the less than Rs 15 lakh ticket size increased to 52% in March 2022 from 40% in March 2021. Of the total term deposits, as on March 31, 2022, 53% were for a period exceeding a year. This helps contain the risk of unexpected reduction in deposit base. Meanwhile, traction in CASA has remained low and stood at 17.3% of total deposit base and 11.1% of the total external liabilities as of September 30, 2022, as compared to 18.8% of total deposit base and 11.3% of the total external liabilities as of March 2022.
The senior management has longstanding experience in the financial services sector. Mr Baskar Babu, the managing director and Chief Executive Officer, is one of the promoters who has held senior positions in several institutions. Board of directors and senior management comprise experienced and renowned professionals from the financial services sector, strongly oriented towards establishing high-quality and scalable systems and processes.
Weakness:
After profitability deteriorated in fiscal 2018, it improved in 2019 and again in 2020. In absolute terms, pre-provisioning profit was Rs 306 crore in fiscal 2020 against Rs 212 crore in 2019. Operating expense ratio has also remained under control despite transition to from an MFI to a bank.
However, earnings were affected in fiscal 2021 due to interest reversal on account of higher NPAs, leading to decline in net interest income. Furthermore, because of pandemic-related stress, the bank reported higher provisioning that led to profit after tax of Rs 12 crore in fiscal 2021 with return on assets of 0.2%; against PAT of Rs 111 crore and return on assets of 2.5% in fiscal 2020.
Profitability was further affected in fiscal 2022 due to higher credit costs (5.36% in FY22 versus 2.8% in FY21) resulting in a loss of Rs 93 for FY22 crore. On the other hand, pre-provisioning profit improved to Rs 265 crore in fiscal 2022 as compared to Rs 181 crore in fiscal 2021. . In H1 2023, the bank reported PAT of Rs 21 crore with credit cost of 3.5%(annualised) as compared to loss of Rs 50 crore and credit cost of 6.2% (annualised) in H1 2022. Going forward, operating and overall profitability is expected to restore gradually in the normal course of business over the medium term.
Over the last two years, asset quality of the bank has been impacted owing to the pandemic disrupting the cash flows and repayment capabilities of several borrowers. Asset quality remained weak with GNPA and NNPA at 11.8% and 6.0%, respectively; against 9.4% and 4.7%, respectively, in March 2021. As of September 2022, GNPA and NNPA improved to 9.9% and 4.8%, respectively with provisioning coverage ratio of 54.5%. Moreover, around 26% of the GNPA accounts are paying customers as of September 2022. Additionally, the bank has outstanding standard restructured portfolio of Rs 185 crore as of H1 2023, billing for which has already started from July 2022 onwards.
While strong capitalisation provides a buffer against asset quality deterioration, revival to pre-pandemic metrics will take time, and the ability of the bank to reinstate repayment discipline among customers will be a monitorable.
A significant portion of the portfolio (64% in 1H2023) comprises microfinance loans to clients with below-average credit risk profiles and lack of access to formal credit. These customers belong to the semi-skilled self-employed category with volatile incomes that depend on the local economy. Slowdown in economic activity has put pressure on such borrowers' cash flows, thereby restricting their repayment capability. This segment of borrowers continues to be subjected to idiosyncratic risks on account of socio-political factors.
As far as the non-microfinance segment is concerned (accounts for 36% of the AUM), the bank’s track record is limited, with low vintage in divisions such as commercial vehicle loans, home loans, and loan against property. Despite gradual expansion into non-microfinance products in recent years, their share in the total AUM remains low. The overall portfolio is distributed across Maharashtra (32%), Tamil Nadu (25%), Odisha (14%), Gujarat (11%), Karnataka (6%) and Madhya Pradesh (7%) as of Sep 2022. The Bank also has limited presence in Chhattisgarh, Puducherry, Telangana, Rajasthan, Uttar Pradesh, Chandigarh and Delhi.
As the bank intends to increase share of the non-microfinance segments, ability to maintain sound asset quality while managing growth and profitability across economic cycles would be a key monitorable. |
Liquidity: Strong Liquidity coverage ratio was healthy at 208% as on March 31, 2022, on daily average basis for the respective quarter. The management has maintained very high liquidity during this period, with statutory liquidity ratio of 24% as of September 2022. Moreover, the bank has access to systemic liquidity facilities such as liquidity adjustment facilities and call money market instruments which can be utilized if need be. |
Rating Sensitivity Factors Downward factors
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About the Company Suryoday SFB started as a non-banking financial institution (Suryoday Micro Finance Ltd) in November 2008, providing micro loans to women in urban and semi-urban areas under the joint liability group model of lending. It commenced operations as a small finance bank on January 23, 2017 and received the status of a scheduled commercial bank in fiscal 2018. As of September 2022, Suryoday SFB had operations across 14 states and Union Territories, catering to 20.9 lakh customers through 567 branches. The loan AUM stood at Rs 5,378 crore as on September 30, 2022. The bank also had outstanding deposits aggregating Rs 4,207 crore. |
Key Financial Indicators
@Annualised for H1 2023 |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Criteria Details
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