Profitability of SFBs to decline in Fiscal 2021, improve thereafter

Newly converted SFBs had a challenging beginning in Fiscal 2018, as many players experienced decline in profitability
due to losses in the second half of the financial year on account of stressed microfinance accounts. The main reasons for
the sharp increase in non-performing assets in the microfinance portfolio of SFBs was demonetization and loan waivers,
and demonetization also increased credit cost in Fiscal 2018.

Profitability revived in Fiscal 2019 as credit costs on newly originated loans disbursed post demonetization was lower.
Further, due to a rapid growth in deposit base and a consequent reduction in cost of funds NIMs also increased in Fiscal
2019 compared to the previous year. Profitability however remained partly constrained by high operating expenses
representing approximately 5.50% to 6.00% of average assets.

In Fiscal 2020, profitability for SFBs is estimated to have declined on account of increased provisioning in the pandemic-
weakened economy, which affected the daily wage earners and self-employed individuals who are the target customer
base for SFBs. In Fiscal 2021, interest income growth is expected to be lower with fewer disbursements and increasing
pressure on margins. CRISIL Research also expects lenders to spread their credit cost over couple of years, as and when
the impact of COVID-19 becomes more apparent, hence the credit cost is expected to remain elevated in coming two
fiscals. Going forward, it is expected that the ability to maintain sound asset quality in lending while managing growth
will be key for profitability.

Impact of COVID-19

The financial position of Yes Bank declined since 2018 largely due to inability of the bank to raise capital to address loan
losses and resultant downgrades, triggering invocation of bond covenants by investors. After careful considerations of
these developments on March 5, 2020, RBI imposed a 30-day moratorium on Yes Bank, capping deposit withdrawals at
% 50,000 owing to deterioration in financial position of the bank. It also superseded the bank’s board. The moratorium
was lifted on March 18. In the wake of the crisis, many shifted their deposits to PSBs and larger established private banks.
SFBs, which have a liability franchise, are newer entities in the sector. They may find it difficult to gain customer
confidence and should focus more on building a strong reputation if they have to maintain stable deposits. However,
higher interest rates offered by SFBs will be an attraction. In addition, the amended Deposit Insurance Credit Guarantee
Corporation (DICGC) rules benefit SFBs. The new rules increased the deposit insurance to up to = 500,000 (principal
and interest) from = 100,000 earlier.

Even as the financial sector was dealing with the Yes Bank issues, the COVID-19 pandemic affected the sector with the
nation-wide lockdown to arrest the spread of the virus impacting the normal operations of businesses.While banks
continue to operate, there were very few fresh loan disbursements. The offtake is likely to remain subdued throughout the
first half of Fiscal 2021 and is expected to get better in the second half. Banks with stronger deposit base, varied funding
avenues, deeper distribution network, superior underwriting skills, higher capability to offer customised products, and
ability to keep asset quality under check are expected to continue to drive growth and stay ahead of the pack.

SEBs differentiate themselves from other banks by offering personalised service to customers. These include home visits
for deposits, withdrawals, credit underwriting, loan collections and maintaining close customer touchpoint on a monthly
basis. However, the nationwide lockdown and social distancing norms have put a stop to SFBs’ doorstep service. This
has prompted them to increase their focus on digital initiatives. SFBs that have already transitioned and made requisite
investments in people, process and technology are expected to reap more benefits and grow faster than their peers.

Peer comparison

The following comparison of Suryoday SFB with all its peers in India is based on the latest available data for Fiscal 2020,
and listed microfinance players. The information presented in this section is based on the calculations set forth below:

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