Asset quality, NPAs and provisioning requirements

Our ability to manage the credit quality of our loans, which we measure in part through NPAs, is a key driver of our results of
operations. In addition to requiring us to make a provision on standard assets, the RBI requires us to classify and, depending
on the duration of non-payment, make a provision on loans that become NPAs, which are further sub-classified as sub-standard,
doubtful and loss assets. As the number of our loans that become NPAs increases, the credit quality of our loan portfolio
decreases. In accordance with RBI norms, we are required to classify loans that are over 90 days past due as an NPA. The
following table illustrates our asset quality ratios as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, As of December 31,
2018 2019 2020 2019 2020
NPAs
Gross NPA/ Gross Advances (%) 3.54% 1.81% 2.79% 2.78% 0.78%
Net NPAs / Net Advances (%) 1.86% 0.44% 0.57% 0.52% 0.33%

 

We provide floating provision of 2% on outstanding standard JLG portfolio in addition to standard asset provision requirement
of RBI. As of December 31, 2020, we have an outstanding floating provision of = 537.73 million on outstanding standard JLG
portfolio. As at March 31, 2020 and at December 31, 2020, we have outstanding COVID-19 provision of = 659.91 million and
2 1,407.10 million, respectively.

Our credit quality is dependent upon our credit appraisal processes and recovery mechanisms. With the growth of our business,
our ability to manage the credit quality of our loans will be a key driver to our results of operations, as quality loans help reduce
the risk of losses from loan impairment and write-offs.

We believe that the quality of our credit function, resulting in effective credit evaluation measures, as well as our systematic
processes such as verification of borrower risk profile, source of repayment, underlying collateral and disbursement and
collection processes, effective portfolio monitoring and timely corrective interventions have enabled us to maintain relatively
low levels of NPAs. Our ability to reduce or contain the level of our NPAs is also dependent on a number of factors beyond
our control, such as increased competition, adverse effect on the business and results of operations of our borrowers, a rise in
unemployment, a sharp and sustained rise in interest rate, slow industrial and business growth, changes in customer behavior
and demographic patterns, central and state government decisions (including agricultural loan waivers) and changes in
regulations, including with respect to regulations requiring us to lend to certain sectors identified by the RBI. Any increase in
the level of final credit losses or an inability to maintain our asset quality may adversely affect our NPA levels and require us
to increase our provisions and write-offs.

Provisions for NPAs are created by a charge to our profit and loss account and are currently subject to minimum provisioning
requirements, linked to ageing of NPAs. Our provision coverage ratio (including floating provision) was 48.33%, 75.80%,
84.71%, 84.22% and 89.58% in Fiscal 2018, 2019 and 2020 and in the nine months ended December 31, 2019 and 2020,
respectively, and there can be no assurance that our provision coverage ratio will continue to increase or that it may not decline
in the future. We may need to make further provisions if there is dilution/ deterioration in the quality of our security or down-
grading of the account or recoveries with respect to such NPAs do not materialize in time or at all. This increase in provisions
may adversely impact our financial performance.

Competition

We have a limited operating history as an SFB and the success of our banking operations depends on a number of factors,
including the demand for our services and our ability to compete with other banks and financial institutions effectively. The
banking and financing sector in India is highly competitive and we face competition in all our principal areas of business. We
face our most significant organized competition from other SFBs, NBFCs, microfinance institutions and cooperative banks
which have significant presence in rural areas, public sector banks, private sector banks, housing finance companies and other
financial services companies in India. In addition, many of our potential customers in economically weaker segments do not
have access to any form of organized institutional lending, and rely on loans from informal sources, especially moneylenders,
landlords, local shopkeepers and traders, at higher interest rates. In the organized sector, our competitors may have a better
brand recognition, greater business experience, more diversified operations, greater customer and depositor base, wider network
of branches and better access to, and lower costs of funding than we do. Further, the RBI has issued Guidelines for On-Tap
Licensing of SFBs in the Private Sector on December 5, 2019, which permits applicants to apply for SFB license to the RBI at
any time, subject to fulfilment of certain eligibility criteria and other conditions. We anticipate that this will increase competition
within small finance banks operating in India, including our Bank. Further, consolidation in the industry driven by the merger
of other banks is likely to further increase competition by creating larger, more homogeneous and potentially stronger
competitors in the market. Increase in operations of existing competitors or entry of additional banks offering similar or a wider
range of products and services could also increase competition. Further, with the advent of technology based initiatives and
alternative modes of banking, we may face increased competition in this sector, which may in turn impact our revenues and
profitability. We also face competition from specialized fintech companies who could disrupt our origination, sales and

 

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