Rationale

The assigned rating takes into Fincare Small Finance Bank's (FSFB) experienced senior management team, strong monitoring and controls, adequate capitalisation profile and the improvement in its earnings profile. FSFB's capitalization profile has been supported by capital infusion during FY2019, the bank received an equity infusion of Rs.140 crore in H1FY2019 and Rs. 85 crore in Q4FY2019. ICRA notes that, the bank would require regular capital infusion going forward to meet its envisaged growth over the near to medium term. Based on the track record of FSFB's equity raising in the past and its strong investor profile, ICRA expects the bank to raise equity in a timely manner going forward as well. With good collection efficiencies being reported in the portfolio generated post February 2017, the bank's asset quality has improved - following sizeable provisioning and write-off of Rs.134.9 crore during FY2018 and Rs.35.0 crore in FY2019 towards demonetization related delinquent portfolio. FSFB's 90+ delinquencies have improved from the peak of 15.11% as in July 2017 to 2.50% in August 2019 and the bank's net non-performing accounts (NNPA) stood at Rs.16.14 crore (0.45%) as on June 30, 2019. The profitability has improved with return on average managed assets (RoMA) improving to 2.6% in FY2019 from -4.3% in FY2018 as provisions related costs, which impacted earnings in the past, moderated. Given the diversification into newer asset classes (such as loans against property (LAP), institutional finance, loans against gold, affordable housing loan and 2-wheeler loans), it will be crucial for the bank to keep the internal controls, processes and, asset quality under control going forward. Going forward, the bank's ability to maintain profitability in the face of higher operational expenses owing to upgradation of systems and expansion in the management team and higher branch banking costs compared to microfinance (MFI) branches would be monitorable. ICRA notes that the bank's ability to scale up low cost retail deposit base and secure incremental refinancing lines would be crucial from liquidity perspective. The rating continues to factor in the risks associated with the unsecured nature of microfinance loans, credit risk emerging from the marginal borrower profile and other socio-political and operational risks inherent to the microfinance business, which current accounts for bulk of its exposures.