This adjustment is due to increased stress in microfinance in certain hotspot states such as Punjab, Haryana, Gujarat, UP, and Kerala.
In response, the bank has decided to slow down disbursements (without a blanket ban) and increase its focus on collections.
Management noted that the microfinance segment will face higher credit costs in FY25, primarily from Punjab, Haryana, Gujarat, and UP.
Stress began building from Q2 FY24, leading the bank to proactively slow down loan growth in these identified hotspots.
The microfinance segment will see lower growth at around 10%, while individual loans will grow faster at over 25%.
Shares of Ujjivan Small Finance Bank fell 7.56% in today's intraday trade, hitting a 3-week low of ₹44.70 apiece after the management reduced the bank’s loan growth guidance to around 20% for FY25, down from the earlier guidance of 20%–25%. Additionally, the bank increased its credit cost guidance to 1.7%, up from the previous 1.4%–1.5%.
This adjustment is due to increased stress in microfinance in certain hotspot states such as Punjab, Haryana, Gujarat, UP, and Kerala. In response, the bank has decided to slow down disbursements (without a blanket ban) and increase its focus on collections.
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Management noted that the microfinance segment will face higher credit costs in FY25, primarily from Punjab, Haryana, Gujarat, and UP. Stress began building from Q2 FY24, leading the bank to proactively slow down loan growth in these identified hotspots.
In Punjab and Haryana, the Karza Mukti Andolan in the districts of Amritsar, Jalandhar, Hoshiarpur, and Gurdaspur contributed to the stress. In Gujarat, an influx of lenders led to a lack of borrower discipline, compounded by a slowdown in the diamond industry, reducing income levels.
In UP, five out of the 29 districts where the bank operates its microfinance business saw credit costs rise above 2%, compared to an average cost of less than 1.5%, according to a domestic brokerage firm, Antique Stock Broking.
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The brokerage firm said that the slowdown in group microfinance loans will be compensated by robust growth in individual loans and the affordable housing segment. It said that the bank aims to increase the share of its secured book to 40% from the current 30% over the medium term.
Affordable housing is expected to grow at a rate of 40%. The microfinance segment will see lower growth at around 10%, while individual loans will grow faster at over 25%.
The bank is focused on transitioning group loan customers to individual loans for those with a good repayment history, which will reduce customer interest costs, provide better services, and create opportunities for cross-selling products, it noted.
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Recently, the bank has begun offering gold and vehicle loans, which will boost the share of secured assets and enhance margins and profitability.
"While industry challenges exist, their impact on Ujjivan has already been factored into its numbers. Our EPS estimates are 10%–15% below consensus for FY 25–26. Valuations are reasonable at 1.1x FY26 and 0.9x FY27 BV for an expected RoA of 2.7%–2.3% and RoE of 20%–17% over FY 25–27, and therefore we maintain 'buy', said the brokerage.
Meanwhile, the management acknowledged that the bank meets the RBI’s guidelines for a universal banking licence. These guidelines include criteria such as a Gross Non-Performing Assets (GNPA) ratio of less than 3%, a Net Non-Performing Assets (NNPA) ratio of less than 1%, a net worth exceeding INR 10 billion, being a listed Small Finance Bank (SFB) for five years and having a diversified business portfolio.
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Obtaining a universal banking licence would free up 5%–6% of capital, reduce the Priority Sector Lending (PSL) requirement from 75% to 40%, and remove the condition of maintaining 50% of the portfolio in small-ticket loans.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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