It does seem that recovery can happen faster and the temporary shock that we have seen in terms of reduction of collection efficiency in April and May will hopefully start to recover from the next quarter onwards, said Nitin Chugh, MD & CEO, Ujjivan SFB to ET NOW. Edited excerpts:
What has led to your net interest margins declining and to a rise in your asset quality, your GNPAs versus the pro forma GNPA?
The reduction in income has been on account of the de-recognition of the interest on the GNPA, the non-performing book. That has led to both shrinking in the NIMs, as well as the total income. That is completely attributed to that. As far as the increase in GNPA is concerned, it was trending in that direction, we had to put it at nearly 5% pro forma GNPAs for the quarter of December 2020 and that has been more or less in that line. Additionally, we have not written off very much. For the overall last financial year, we have written off only about Rs 74 crores, so that also has stayed with the overall GNPA numbers – the way it looked like in March 2021.
For the sector as a whole, how are you looking at the impact of the second Covid wave on your disbursement growth, collections, overall asset quality, provisions, etc? How do you see this for the sector as a whole being impacted?
We deal predominantly with the low-income borrowers as a small finance bank
and nearly 72% of our portfolio is microfinance, which has indeed been the hardest hit in the last year and even during the second wave largely on account of three things. One, because of the lockdowns there is reduced mobility or probably no mobility at all and people have been unable to go back to their businesses/livelihoods. The second of course is the change in the demand. There has been a demand shock also, like we have heard from the economists over the last few weeks, that has resulted in a loss of income and cash flows for a lot of the customers who are still able to open their businesses. The third is a very clear impact of the infections in rural areas, which has also impacted livelihood.
As for collection efficiencies, we reached a fairly healthy number of 94% in March. However, in April that dropped by about 6% to 88% on account of the second wave which started to show in the form of lockdowns in the second half of April. In May, while the month is still going on, things are not necessarily any better because of continuing conditions of the second wave. We are however hopeful that now the cases have started to come down and there is a better grip on the overall healthcare situation, we do expect normalisation to happen. And in general, the sector is likely to benefit from all the announcements that the Reserve Bank has made on the 5th of May and we are very happy and grateful that it has come very timely. So, all of that is getting assessed and it does seem that this time around things would be able to recover a lot faster than what we saw in the financial year.
You have given some April collections numbers that are below 90. Could you analyse and tell us the impact of that? If the number falls below 90, how does that start impacting your collections?
It does impact, however the impact shows up with a lag. Last time around, if we have to draw a parallel, we had offered moratorium to practically 100% of our microfinance portfolio and overall it was nearly 90% of our total portfolio at a bank level that we had offered a moratorium. The collections efficiency picked up only in the second quarter and they went up to levels of 65% in August and closer to 80% only by October or thereabout. So, this time around while that is not the situation, April has been a rather sharp drop all across the industry, at least in small finance banks and microfinance.
What it does look like is that we may not have a lag of the kind we saw last year because the recovery could also be a little faster. It is too early to say to what extent it will impact on an overall basis for the entire year, but it does seem that the recovery can happen faster and therefore the temporary shock that we have seen in terms of reduction of collection efficiency in April and in May will hopefully start to recover from the next quarter onwards.
Is it a good idea to compare the second wave and the first wave because the numbers are high and this time rural India has got impacted? The first wave the fear was high, numbers were low, and it did not hit the rural India, but now it is the other way round.
You’re right, I do not think it is a like-to-like comparison. However, there are both positives as well as negatives, and negatives of course you talked about in terms of the spread and the number of people impacted. Most of us have also been impacted at a personal level in some way or the other, which was not the case to that extent the last time around. The positives are also very clearly significant. One, the learnings from last year are very pronounced. Two, I think most of the banks including us are carrying fairly healthy provisions. Three, this time around, because of the vaccination and whatever else that the healthcare infrastructure is going through in terms of being able to manage this, the hope is that the recovery would also be a lot sharper.
We have indeed seen the number of cases now starting to come down. Rural areas are a worry because last time around they were reasonably insulated from the overall Covid wave, this time while they are impacted. I think the recovery might happen with a little bit of a lag. But again, because it is expected that the monsoons would be normal this year as well, we do not expect too much of a change in the economic conditions on a long-period basis. It might just be a temporary disruption that we are seeing largely on account of the number of cases.
Investors who have interest in your stock say two things are important. One, what will happen on the entire issue of the holding company structure and then what will happen to the new MFI rules if RBI imposes a cap on the spread? Have you heard anything from RBI and when should we see more clarity on both these aspects?
We have not heard anything formally, though we have picked up in our regular interactions that the discussion paper for harmonisation might be issued by RBI anytime soon. Therefore, when that happens, we will be able to clearly discuss the various contours. However, on our side when this whole discussion started about harmonisation, one of the key things like you did mention is about the cap. We have simulated the impact of if at all the cap like that has to come adjusted for CRR, SLR etc. We do not see a change of more than 120 to 125 bps in the yields if at all that happens.
As far as the holding company structure is concerned, we are in our fifth year of corporations. The present guidelines allow us to apply to RBI asking for reverse merger of the holding company with the bank after we complete five years. I think we will approach that as and when we finish five years. In the meantime, in case there are very specific guidelines that are issued by RBI on the basis of recommendations from the internal working group, then we would want to take a call based on that. But those guidelines are also expected perhaps in this quarter itself.
To understand the broader outlook going forward, would you be going slower from here on? What is the trend looking like at this point and what is the growth outlook you have for FY22?
We have indeed slowed down our disbursals. One for the fact that there has been a demand compression of a very large magnitude this time around, largely on account of the three reasons that I mentioned earlier on. However, since we have been able to reach a certain level in the last quarter, predominantly in the month of March, I think our level of preparedness, both on the people distribution side as well as on the technology side is extremely high. As and when things start to roll back to normal, it will just be a matter of maybe a few weeks that we would be able to restore the normal levels of business.
Again, I would like to say that it is dependent on the demand. We do expect the demand to also come back and on that basis we do estimate that we should at least get three quarters in this year, unless of course there is a case for a third wave, which hopefully enough we should not have to go through. But as things stand right now and if cases keep reducing, we do expect things to start normalising from July onwards and therefore get three clear quarters in the year. We should be able to grow in a reasonable manner in this financial year. The exact numbers and all of course will get plotted as things start to normalise.
NIMs also saw a bit of a decline due to derecognisation of interest income. What kind of levels do you foresee there going forward?
NIMS have been cushioned to a large extent due to reduction in our cost of funds, which has happened fairly systematically and to a large extent by almost 120 bps over the last financial year. It has also been cushioned through a systematic reduction in our operating expenses. Our operating expenses to total assets are now at 6.2% versus 8.2% in the last financial year. So there has been a substantial improvement in terms of what you have cushioned the yields with.
On the other hand, because we have started to move into more formal segments because we also do need to derisk and diversify the portfolio, we have been making systematic changes to our new customer acquisition strategy in trying to deal with more formal segments as much as we are trying to also diversify out of microfinance; which is a stated strategy. It does appear that the NIMS will continue to come off. They are unlikely to stay in the same range of 10% to 11% like we have seen in the past when we are only doing micro finance business.
However, because of these cushions and hopefully enough if the whole situation resolves itself and we do not have to create more provisions or any more derecognition of any income, then the NIMS would likely improve from here. But they would again be in a certain range. I do not expect them to be going back to the FY19 or FY20 levels because the circumstances have changed and we are ourselves now looking to deal with the more formal category of customers in a meaningful manner so that we can keep cushioning the book as well.