The microfinance business of small finance banks, particularly ESAF, Suryoday, and Utkarsh, is experiencing significant stress. Approximately 20% of their microloan books are under stress, with portfolios at risk (PAR) for over 30 days ranging from 19.73% to 23.23% as of June-end. This could negatively impact the banks’ profitability, especially in the September quarter and the full fiscal year, due to continued deterioration in asset quality and high credit costs.
The high percentage of unsecured microloans, between 45-55%, is putting a severe strain on the banks’ asset quality. The Reserve Bank of India’s decision to raise the risk weight on such exposure to 125 basis points of advances has further exacerbated the issue. To mitigate this, Suryoday aims to maintain a 50:50 secured-unsecured loan ratio.
ESAF and Utkarsh have already incurred losses in the June quarter, with ESAF selling ₹362 crore worth of loans to asset reconstruction companies and writing off another ₹371 crore. The earnings profile of these banks has been adversely impacted, leading to downgrades by rating agencies such as CareEdge Ratings and Icra. Utkarsh’s gross and net NPA ratios have risen to 11.4% and 5.0%, respectively, while ESAF’s gross NPA stands at 7.48% and Suryoday’s ratio is at 8.5%.
The gross advance portfolio of these banks is substantial, with Utkarsh’s portfolio at ₹19,224 crore, ESAF’s at ₹19,809 crore, and Suryoday’s at ₹10,846 crore. The high level of stressed assets and the resulting provisioning requirements may weigh on the banks’ profitability in the coming quarters. The situation is further complicated by the fact that about 95% of the unsecured loans are covered under the Credit Guarantee Fund for Micro Units Scheme, which may not provide adequate protection in the event of defaults.
Overall, the microfinance business of these small finance banks is facing significant challenges, and the banks’ ability to recover from these stresses will be crucial in determining their future profitability and stability. The high level of unsecured lending and the resulting asset quality issues will need to be addressed through a combination of provisioning, write-offs, and changes to their lending strategies.