Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the Rs 2,500 crore certificate of deposits programme of Ujjivan Small Finance Bank Ltd (Ujjivan SFB).

 

The rating continues to reflect the strong presence of Ujjivan SFB in the microfinance business with gradual expansion into other asset classes, strong financial risk profile supported by adequate capitalisation and normalisation in profitability. These strengths are partially offset by the bank’s small, though growing, base of retail deposits and susceptibility of asset quality to modest credit risk profile of majority of the borrowers.

 

Growth in gross advances remained healthy in fiscal 2024 at 24% (33% for fiscal 2023, 20% for fiscal 2022 and 7% for fiscal 2021). However, the bank’s strategic call to slow-down disbursements in the microfinance segment in light of prevailing challenges like over-indebtedness, yielded a moderate growth of 2% (year-to-date) in advances for the first half of fiscal 2025, with gross advances being Rs 30,344 crore as on September 30, 2024. Over this period, the share of micro-banking portfolio (group loans, individual loans and rural loans) in the overall gross advances, after increasing to 72% as on March 31, 2023, decreased to 64% as on September 30, 2024.  As on December 31, 2024, the overall gross advances are estimated to be Rs 30,466 crore (provisional), remaining flat over the quarter.

 

The asset quality restored in fiscal 2024 with gross non-performing assets (GNPA) and net non-performing assets (NNPA) improving to 2.1% and 0.3% as on March 31, 2024, from 2.6% and 0.04%, respectively, a year ago. However, these metrics moderated marginally in the first half of fiscal 2025 due to ongoing stress in the microfinance segment. GNPA and NNPA stood at 2.5% and 0.6% as on September 30, 2024. On a provisional basis, GNPA further increased to 2.7% as on December 31, 2024.

 

The profitability improved over fiscal 2023 with return on managed assets (RoMA) increasing to 3.7% from -1.9% in fiscal 2022. It corrected to 3.3% in fiscal 2024, owing to lower net interest income and marginal rise in credit cost. However, as credit costs continued to increase in H1 2025 due to asset quality challenges plaguing the microfinance and allied unsecured segments coupled with an increase in operating expenses, RoMA moderated to 2.5% (annualized). In terms of capitalisation, the bank reported an adequate tier I and overall CAR of 21.6% and 23.4%, respectively, as on September 30, 2024.

 

The slowdown in credit uptick has translated into moderate growth in deposits, reflected in 8% growth in deposits base over first half of fiscal 2025 as against 14% growth over first half of fiscal 2024.  As on September 30, 2024, the bank’s total deposit base was Rs 34,070 crore which constituted 93% of the external liabilities (Borrowings + Deposits). Retail deposits (retail term deposits [TDs] + CASA) formed 73% and CASA, 25.9% of the total deposits. As on December 31, 2024, deposits stood at Rs 34,496 crore and CASA ratio was 25.1% on a provisional basis.

Analytical Approach

CRISIL has assessed the standalone credit risk profile of Ujjivan SFB in order to arrive at the rating.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in the microfinance space, additional benefits to accrue on account of gradual diversification across secured asset segments: Ujjivan SFB, the third largest small finance bank in the country, benefits from its strong presence and longstanding track record of over two decades in the microfinance space in India. Of the total portfolio, as on September 30, 2024, 64% constituted micro-banking loans (group, individual and rural loans), down from 72% as on March 31, 2023. Within this, group loans under Joint Loan Group (JLG) model were 49% (of the gross advances) whereas another 15% comprised of individual loans to microfinance borrowers who have had a long association with the bank.  Following the pandemic outbreak, growth in micro-banking portfolio declined to a two-year average of 6.5% for fiscal 2021 and 2022. However, a faster relaxation in lockdown thereafter and pent-up demand for credit led to a steep increase in disbursements in the subsequent period, yielding an annual growth of 33% in fiscal 2023 followed by a steady growth of 24% for fiscal 2024. However, given the issues like over-leveraging which are plaguing the microfinance segment presently, incremental deployment within this sector has been curtailed.

 

Overall advances grew by 1.9% (annualised) in the first half of fiscal 2025 as against a 10% growth registered in first half of the previous fiscal. The suppression in growth was a factor of 7% decline in microfinance portfolio over this period and, this trend continued over Q3 2025 – resulting in a nine monthly growth of 2.3% (annualised) for fiscal 2025.

 

The share of micro-banking loans (group loans, individual loans and agriculture loans) loans in gross portfolio, though declined to 61% of the gross advances, still remains dominant. This makes the portfolio susceptible to socio-economic adversities. However, Ujjivan SFB has been strategically intending to reduce its exposure to this segment so as to curtail it at 50% levels in the long run. As on December 31, 2024, aside from 61% of micro banking portfolio, 21% of the gross advances comprised of affordable housing loans followed by financial institutional group (FIG) accounting for 7% and SME loans accounting for 6%. Other segments including vehicle loan, gold loan, personal loan, staff loan etc are growing and were at 5% of the overall AUM, up from 2% as on March 31, 2023. 

 

Over the medium term, while microfinance shall continue to form the dominant share of the loan portfolio, the bank plans to focus on scaling its affordable housing including micro mortgages, SME books as well as gold loans and vehicle loans. Moreover, exposure to political and regulatory uncertainties associated with the microfinance sector would diminish gradually as the bank increases its scale in the non-microfinance business wherein the target customers are relatively more affluent.

 

The operational presence of Ujjivan SFB remains geographically well diversified. In its portfolio, no state accounts for more than 15% of the total loan book. As on September 30, 2024, top 4 states for the bank’s portfolio were – Tamil Nadu (14%), Karnataka (13%), West Bengal (12%), Maharashtra (9%) and Gujarat (8%). The bank’s established presence in the microfinance space has helped it in diversifying into adjacent segments, such as micro and small enterprise loans and micro-LAP (loan against property) financing

 

• Adequate capitalization: Ujjivan’s capital position is adequate reflected in a tier I and overall capital adequacy ratio of 21.6% and 23.4% on September 30, 2024 (22.6% and 24.7% as on March 31, 2024).  The bank has paid dividend during Q2 FY25 to the tune of Rs 290 crores which led to tier I and overall capital adequacy reducing from 22.6% and 24.7% as on March 31, 2024.  As on September 30, 2024, networth was comfortable at Rs 5,882 crore supported by the last round of capital infusion through QIP in fiscal 2023.

 

Over the medium term, the bank’s capitalisation is expected to remain adequate supported by stable accretions to networth.

 

• Stable profitability, though ability to maintain the same across business cycles remains critical: After remaining modest in the aftermath of Covid-19 due to credit quality challenges, profitability revived in fiscal 2023. For fiscal 2022, as credit costs elevated to 5.3%, the bank reported a net loss of Rs 415 crore. However, as the situation restored leading to stabilization of net interest margins (NIMs), higher recoveries and reduction in credit costs, the bank’s overall earnings profile revived with a profit of Rs 1,100 crore for fiscal 2023, corresponding to a RoMA of 3.7%. For fiscal 2024, the bank reported a profit of Rs 1281 crore, translating to a RoMA of 3.3% (annualized). The reduction in RoMA was a factor of lower NIMs and relatively higher credit cost. Net Interest Income to average managed assets [NIMs] reduced to 8.7% in fiscal 2024 from 9.0% in fiscal 2023. Credit costs were at 0.5% as compared to 0.1%, for the respective periods.

 

In the first half of fiscal 2025, the bank reported a PAT of Rs 534 crore translating into a RoMA of 2.5% as compared to profit and RoMA of Rs 652 crore and 3.4% reported in corresponding period of previous fiscal. The moderation in RoMA was on account of higher operating expenses and credit cost. Operating expenses to average managed assets increased to 6.1% from 5.5% as the bank opened new branches, strengthened collections team and made investments in technology. Credit costs rose to 1.2% from 0.4% due to higher write-offs and provisioning done towards the evolving MFI industry situation. As on September 30, 2024 – provision coverage ratio (PCR) came down to 78% from 96.1% as on September 30, 2023. The bank continues to have total floating provisions of Rs 250 crore, out of which Rs 120 crore has been utilized as a buffer in PCR calculation, Rs 30 crore has been moved to tier II capital with prior approval from RBI and Rs 100 crore is shown under other provisions.

 

While asset quality has remained, range bound over the past 12-16 months, a gradual uptrend in NPAs was witnessed over H1 2025 – particularly driven by the challenges being faced in the microfinance segment. On March 31, 2024, GNPA and NNPA were 2.1% and 0.3%, respectively, having improved from 2.6% and 0.04%, a year ago. However, these metrics marginally deteriorated to 2.5% and 0.6% at the end of H1 2025 and are further  the GNPA is estimated to have risen to 2.7% over Q3 2025. For the micro-banking portfolio, which comprises 64% of the overall advances as of September 30, 2024, the 30+ and GNPA inched up from 2.7% and 1.9% as on March 31, 2024 to 4.1% and 2.6%, respectively, as on September 30, 2024. This moderation was reflective of issues like overleveraging, ground level attrition, etc. that have impacted the entire segment in H1 2025. As on September 30, 2024, the bank had a restructured portfolio of Rs 60 crore. In November 2024, the bank has completed the sale of stressed loan micro-banking portfolio including written of loans pool with outstanding value of Rs. 270.4 crore as on September 30, 2024, to an ARC pursuant to Swiss Challenge Method, for a consideration amounting to Rs 40.6 crore. Bank carries an overall provision of 85.6% on the above pool.

 

Given the bank’s target market has a major composition of customers with below average credit risk profile, its ability to insulate its overall asset quality from macro disruptions remains critical. In addition, as it continues to scale its non-micro-banking portfolio, its ability to sustain asset quality at optimal levels remains a key rating sensitivity factor.

 

Weaknesses:

• Small, though increasing, share of CASA and retail deposits in overall deposit base: While the share of retail deposits (CASA and retail term deposits of ticket size < Rs 3 crore) has been gradually increasing, it remains relatively smaller than other banks, at 73% of total deposits as on September 30, 2024. Further, CASA  remains modest than banking peers at 25.9% on the same date (26.5% as on March 31, 2024). The proportion of institutional deposits has declined to 25.6% as of September 30, 2024, from 36.6% as on March 31, 2022. The bank's focus on mobilization of deposits increased fiscal 2019 onwards since most of fiscal 2018, after its banking transition, was spent in overcoming demonetization related challenges apart from completing the process of transformation to banking platform. This led to a lagged pick-up in the deposit franchise and thus, the base of retail deposits, including CASA, is low. 

 

In terms of liability maturity profile, initially, the bank initially relied heavily on shorter tenure bulk products like CDs and institutional deposits. However, as banking operations stabilized and efforts were made establish the liability franchise, the share of bulk/ wholesale deposits reduced from 89.4% in December 2017 to merely 25.6% in September 2024. Cost of deposits increased to 7.5% in Q2 2025 from 7.4% in Q2 2024 and 6.2% in Q2 2023. Further, the bank has taken initiatives to increase the share of retail deposits. It has also been attempting to attract a higher share of low-cost savings accounts to attain a balanced mix between current accounts (CA) and savings accounts (SA).

 

• Modest credit risk profile of borrowers: A significant portion of the portfolio comprises microfinance loans to clients with below-average credit risk profiles and lack of access to formal credit. For instance, in the group loans, individual loan and small ticket micro and small enterprise loans, typical borrowers are vegetable vendors, small machine and lathe owners, tea shops, provision stores, small fabrication units, wastepaper recycling units, tailors, and power looms. These customers belong to the semi-skilled self-employed category, and their income flow could be volatile and dependent on the local economy. Recently, four factors have impacted the portfolio quality of microfinance segment. One, lending to over-leveraged borrowers, two, debt-waiver campaigns, three, continued high attrition of field-staff and last, ground-level operational challenges given elections and intense heat wave. The blended impact of these factors resulted in average monthly collection efficiency.

 

The ability of microfinance lenders to control early bucket delinquencies and improve collection efficiency will bear watching.

Liquidity: Strong

Ujjivan SFB’s liquidity profile is comfortable. As of September 30, 2024, assets maturing over the following one year formed 1.01 times that of liabilities maturing over the same period, with no negative cumulative mismatches in time buckets over a 1-year period.

 

Ujjivan SFB reported an excess statutory liquidity ratio of about 5.4% and a provisional liquidity coverage ratio (LCR) of 122% on November 30, 2024 and is expected to continue maintaining adequate buffer in liquidity coverage ratio (LCR). Moreover, Ujjivan as a scheduled commercial bank (SCB) has access to systemic liquidity facilities such as liquidity adjustment facilities and call money market instruments which can be utilised if need be. Apart from that, the bank parks funds in liquid mutual funds and has sanctioned lines from development banks which can also be utilized.

 

ESG profile

The Environment, Social, and Governance (ESG) profile of Ujjivan SFB supports its credit risk profile.

 

The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has a reasonable social impact because of its substantial employee and customer base and can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, lending decisions may have a bearing on the environment.

 

Ujjivan SFB has an ongoing focus on strengthening various aspects of its ESG profile.

 

Key ESG highlights:

• The bank is taking initiatives to improve its disclosures and performance. It has implemented several initiatives to reduce its energy and water consumption, waste generation etc.
• The bank’s gender diversity rate stood at 19.54% as on March 31, 2024 and is marginally better than peer small finance banks.
• The governance structure, with 60% of the board being independent, is characterised by effectiveness in board functioning and enhancing shareholder wealth, presence of investor grievance redressal mechanism and extensive disclosures.
   

There is growing importance of ESG among investors and lenders. Ujjivan SFB’s commitment to ESG will play a key role in enhancing stakeholder confidence, given shareholding by foreign portfolio investors and access to domestic and foreign capital markets

Rating sensitivity factors

Downward factors:

• Significant deterioration in asset quality and/or profitability, causing the RoMA to decline materially and remain compressed for a prolonged period
• Material weakening in capitalization reflected in Tier I capital to risk assets ratio (CRAR) falling to, and remaining below, 18% for a prolonged period.
• Inability to garner retail deposits resulting in the share of CASA as a percentage of total deposits, remaining moderate

About the Bank

Ujjivan SFB is the third largest small finance bank in the country. It commenced its SFB operations in February 2017 by transfer of assets and liabilities of Ujjivan Financial Services Limited (UFSL). The holding entity, Ujjivan Financial Services was set up in 2005 by Mr Samit Ghosh, focused on the urban sector. As on September 30, 2024, the bank had a branch network of 752 spread across 26 states.

 

The bank has reverse merged with Ujjivan Financial Services, post receiving all necessary applicable regulatory approvals-last one being NCLT approval received on April 19, 2024.

 

Pursuant to the effect of the Scheme, 1,44,00,36,800 equity shares and 20,00,00,000 preference shares of the Bank held by UFSL were extinguished. Consequent to the aforesaid extinguishment of UFSL shares in the Bank and issue of equity shares to the shareholders of UFSL, the paid-up equity capital of the Bank has been revised from Rs. 1959 crore to Rs 1932 crore. Further, since the preference capital of Rs. 200 Crores is extinguished, the issued capital of the Bank is reduced from Rs. 2159 crore to Rs. 1932 crore

 

Further to the Scheme being effective, the Bank on May 06, 2024 (allotment date) allotted 1,41,27,02,033 fully paid equity shares of Rs.10/- each of Bank to the eligible shareholders of the erstwhile UFSL, who were holding equity shares of UFSL, as per the share exchange ratio determined in the aforesaid Scheme i.e., 116 equity shares each of Bank for every 10 equity shares of UFSL.

Any other information: Not Applicable