Rationale

The ratings factor in Suryoday Small Finance Bank Limited's (SSFB) experienced board and management team, which has helped it scale up its operations while gradually diversifying its product offerings. The ratings also consider the bank's healthy capitalisation profile with a capital adequacy ratio (CAR) of 41.4% (Tier I: 37.8%) as on December 31, 2021. The current capitalisation profile is comfortable for the bank's near-term growth requirements. The ratings also factor in the healthy traction in SSFB's deposit mobilisation, with deposits comprising 58% of its total borrowings as on December 31, 2021. Moreover, the bank has reduced the share of bulk deposits and is gradually establishing a stable retail depositor base. The share of current account savings accounts (CASA) also improved to ~19% as on December 31, 2021 from 15% as on March 31, 2021 (11% as on March 31, 2020), though it remains relatively low. The ratings also factor in the bank's strong liquidity profile and financial flexibility. SSFB maintained high on-book liquidity in FY2021 and 9M FY2022. Also, its liquidity coverage ratio of 223% for the quarter ended December 31, 2021, was well above the regulatory requirement of 100%. SSFB has access to funding from financial institutions (FIs), which further supports its liquidity profile. It has also raised funds under the Reserve Bank of India's (RBI) Special Long-Term Repo Operations (SLTRO) scheme in 9M FY2022. The ratings are, however, constrained by the significant deterioration in SSFB's profitability metrics, with the bank reporting losses in 9M FY2022, given the Covid-19 pandemic-induced challenges. The asset quality indicators have deteriorated with SSFB reporting gross non-performing assets (NPAs) of 10.5% and net NPAs of 5.6% as on December 31, 2021. SSFB has also restructured 15.8% of its advances (standard is 11.9% and 3.9% is part of NPAs) as on December 31, 2021. The profitability indicators are in breach of the negative triggers as specified by ICRA. However, ICRA estimates that the bank has upfronted a significant part of the credit cost and is expected to witness an improvement in its profitability metrics in FY2023; this would remain a monitorable. Moreover, despite losses, its healthy capitalisation profile and strong liquidity profile would help SSFB meet its stated growth plans in the near term. While the bank has been scaling up its newer products like housing loans, loans to micro, small and medium enterprises (MSMEs), etc, microfinance continues to account for a large share of its portfolio at 67% as on December 31, 2021 (69% as on March 31, 2021) exposing it to risks associated with unsecured lending. The ratings also continue to factor in the political and operational risks associated with microlending, and the marginal profile of the borrowers, which may lead to high volatility in the asset quality indicators. Going forward, SSFB's ability to improve its asset quality indicators, further diversify the asset mix and improve the share of CASA in the deposit profile while scaling up its operations will be important from a credit perspective. The Stable outlook reflects ICRA's expectation that the bank would continue to maintain its credit profile over the medium term and would see an improvement in its profitability aided by the experienced management team, strong capitalisation profile, healthy traction in deposits and financial flexibility.