Demonetisation bleeds small finance banks

After a year since demonetization, micro finance institutions and small finance banks are still reeling under the blow. Microfinance institutions which turned into small finance banks have now realized that it did not guarantee smoother business and things seem to have gotten worse instead. Eight out of ten who got a license have begun their operations now and out of them, three are listed to show the impact of demonetization.

Equitas Holdings which had changed itself to a small finance bank in 2016 has noted that its profits have come down to a shadow of what it made as a microfinance institution. For the September quarter, it reported a net profit of Rs.10.9 crore which is only a sliver of Rs.61.17 crore it made in June 2016. Its micro-credit disbursements have dropped by 27%.

Further, Ujjivan Financial Services which holds Ujjivan Small Finance Bank has also reported a loss of Rs.11.95 crore for the September quarter which is quite low as compared to the profit of Rs.73.01 crore it made a year ago as a micro finance institution. Similarly, AU Small finance bank’s net profit was 21% lower than what it made two quarters ago.

The cost of expansion and cost of adhering to the banking regulations which include provisioning of bad loans were high, which was anticipated by the players but they did not expect the blow of demonetization to their operations. One year since demonetization and small finance banks are reeling under the blow. One of the main bruises was a rise in bad loans. The total bad loans have swelled to about Rs.900 crore for these three banks mentioned above. This has forced them to make cumulative provisions of Rs.156.21 crore in the last three quarters following the demonetization move.

There have been benefits as well, but they are slow and time consuming. The cost of borrowing for the three small finance banks has come down but it has hardly contributed to the income and profit growth. This is because the loan offtake was unimpressive.

Given this background, it looks like the stocks of these small finance banks need a reality check. The stock prices of Ujjivan increased by 20% in the last four months and that of AU small finance bank gained 15%. Equitas is the only stock which has fallen by 9%. These stocks trade higher than their estimated book value because they are the new kids on the block in the banking and financial sector. The potential buildup of deposits and the cost benefits do look less exuberant. However, investors may do well to reevaluate their interest and affection for these lenders.