SFB deposits to grow robustly

 

2500 ) (Rs Bn)
2,000
1,500
4,000 PR yd)
ey Tre
1

FY2018 FY2019 FY2020 FY2021F FY2023F

Note: Amounts are as at the end of fiscal year indicated
F Forecast
‘Source: Company reports, CRISIL Research

Asset quality for SFBs to deteriorate in Fiscal 2021

GNPA of SFBs improved to 1.6% in Fiscal 2019 from 2.2% in Fiscal 2018. This could be attributed to diversification of
product mix into relatively less risky assets, write-off of legacy loans and reduction in microfinance loans. In Fiscal 2021,
SFBs are expected to continue facing severe asset quality issues, as near-term collections could experience disruptions
on account of COVID-19.

However, RBI in March 2020 announced the moratorium on term loans/ working capital for instalments falling due
between March 1, 2020 and May 31, 2020. This was subsequently extended in May 2020 by another three months to
August 31, 2020. A stand-still in asset classification for accounts availing the moratorium was provided from March 1,
2020 to August 31, 2020. For all accounts classified as standard as on February 29, 2020, even if overdue, the moratorium
period, wherever granted, was to be excluded by the lending institutions from the number of days past-due for the purpose
of asset classification.

Recently, the Government of India and RBI announced various measures to support the stability of the financial service
sector. These measures are likely to contain the impact of COVID-19 and economic slowdown. Key measures include:

e RBI extended the window for one-time restructuring of standard accounts of GST registered MSMEs without an
asset classification downgrade that were in default as on January 1, 2020. The restructuring under the scheme had to
be implemented latest by December 31, 2020 (extended from the earlier deadline of March 31, 2020). Definition of
micro small and medium enterprise was broadened to include large size enterprises.

e Guarantee program for collateral-free loans aggregating up to = 3.00 trillion to MSMEs. A special liquidity facility
of up to 2300.00 billion was provided for NBFCs, HFCs and microfinance companies and liquidity infusion of
2900.00 billion was announced for power distribution companies through a central public sector enterprise.

¢ Resolution of stressed assets including restructuring for certain category of advances without an asset classification
downgrade.

e — The repo rate was reduced by 75 basis points (bps) from 5.15% to 4.40% from March 27, 2020. The repo rate was
further reduced by 40 bps to 4.0% from May 22, 2020.

e Reduction in CRR requirement to 3% from 4% earlier. This was effective from March 28, 2020 for a period of one
year up to March 26, 2021. The minimum daily CRR balance requirement was reduced from 90% to 80% effective
from the fortnight beginning March 28, 2020 up to September 25, 2020.

e RBI announced Targeted Long Term Repo Operations (TLTRO) which were auction of targeted long term repos of
up to three-years tenor at a floating rate linked to the repo rate. Liquidity availed by banks under the TLTRO had to
be deployed in investment grade corporate bonds, commercial paper and non-convertible debentures, over and above
the outstanding level of investments in these bonds at March 27, 2020.

Despite these, the lockdown impacted the low and middle income segments the most, that are the target customer segment
of SFBs. While banks have offered a moratorium period to borrowers, SFBs’ asset quality is likely to deteriorate due to
difficulties faced by their borrowers. Going forward, their asset quality will vary depending on their efficiency in credit
underwriting, monitoring and collection. Credit cost of SFBs had declined from 1.7% in Fiscal 2018 to 1.1% in Fiscal
2019, which increased their profitability. However, in Fiscal 2020, the cost increased due to higher provisioning related
to COVID-19 in January-March, which eroded their profitability in fiscal 2020.

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