Growth rates of funds under management likely to slow in FY 22: ICRA

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Growth rates of funds under management likely to slow in FY 22: ICRA

The growth rate of assets under management AUM in financial year 2021 -- 22 FY 22 to 20 per cent from the 18 per cent growth seen in FY 21, according to the small finance banks that are likely to show a marginal improvement, according to ratings agency ICRA.

This growth rate will be lower than the compound annual growth rate CAGR of around 30 per cent during FY 16 -- FY 20.

The recent surge in Covid 19 infections could have a spoilsport and affect the recovery in growth, as the ICRA maintains its cautious stance. The ratings agency said that a recovery is expected by the end of FY 2022 due to the second wave of the Covid 19 pandemic.

Amid the second wave of the epidemic, SFBs had witnessed a decline in collections which resulted in a decline in gross non-performing assets GNPAs of 6.4 per cent as on September 30, 2021, as opposed to 5 per cent as on March 31, 2021.

Performance of the restructured portfolio remains monitorable, despite the gradual ramp up in the collection efficiency of SFBs.

The AUM growth rate declined in H 1 FY 2022 due to the second wave of the pandemic impacting disbursements in Q 1 FY 2022. The industry is estimated to have reported an annualized growth rate of 7 -- 8 per cent in H1 FY 2022. Since disbursements have started picking up, we expect the growth to improve in H 2 FY 2022, pushing full-year AUM growth to around 20 per cent, though it would not be a major impact on the recent rise in Covid 19 infections, Financial Sector Ratings Sachin Sachdeva said.

The ratings agency expects to see a reduction in the GNPAs of SFBs in the second half of FY 22, but it expects to be higher by 70-80 basis points as percentage of total loans as on March 31, 2022, compared to the level as on March 31, 2021, it said.

The risk profile of SFBs remains high because of the higher proportion of unsecured loans despite their foray into retail asset classes such as vehicle loans, business loans, loan against property and housing finance over the last few years, according to the ICRA.

On the liquidity front, it said that SFBs have been able to maintain a favorable asset-liability maturity profile, a high share of non-callable deposits and long-term funding support from financial institutions like NABARD, SIDBI and MUDRA.

It expects SFBs to maintain healthy liquidity, especially given the uncertainty in the industry. Their access to the call notice term money market supports their liquidity.

In FY 2021, the SFBs saw a reduction in net interest margins because of the challenging operating environment and interest income reversal on delinquent accounts. The operating profitability was supported by the reduction in the operating expenses ratio, but ICRA expects that profitability will remain subdued in FY 2022.

Credit costs are expected to remain high in FY 2022, which would keep the profitability subdued due to the elevated credit cost in FY 2021, according to the return indicators in FY 2021. The ability of SFBs to improve operating efficiency and control credit costs would be crucial for the return over the long term, Sachdeva said.