SBFC Finance Limited , a prominent player in the MSME and gold loan segments, has reported a robust financial performance for Q1, despite facing headwinds in the small-ticket MSME loan category.

Financial Highlights

The company posted a profit after tax of INR 101.00 crores for the quarter, marking a significant 28% year-on-year growth and a 7% quarter-on-quarter increase. This milestone achievement reflects SBFC Finance's resilience in a challenging economic environment.

SBFC Finance's Assets Under Management (AUM) reached INR 9,351.00 crores, showcasing a strong 30% year-on-year growth. The company's yield improved by 11 basis points to 17.99%, while borrowing costs decreased by 3 basis points to 9.32%, resulting in a healthy spread of 8.67%.

Operational Performance

The company continued its expansion strategy, adding 10 new branches during the quarter, bringing the total branch count to 215. This expansion has contributed to SBFC Finance's growing presence across India.

SBFC Finance maintained a strong capital adequacy ratio of 34.30%, with a return on equity (ROE) of 13.53%.

Challenges in MSME Segment

Despite the overall positive performance, SBFC Finance is experiencing stress in smaller ticket size MSME loans. The company reported an increase in 1+ Days Past Due (DPD) levels and a drop in collection efficiency. Management cited political risks, particularly in Karnataka, and overleveraged individual balance sheets as key challenges.

In response to these challenges, SBFC Finance has tightened its underwriting standards, increasing rejection rates by 10%. The company expects credit costs to rise by 15-20 basis points from the current 1.11% level.

Asset Quality

The Gross Non-Performing Assets (GNPA) remained range-bound at 2.78% with a Provision Coverage Ratio (PCR) of 44.40%.

Future Outlook

SBFC Finance maintains its guidance for 5-7% quarter-on-quarter AUM growth. The management aims for a 50 basis point reduction in operational costs for the year.

In conclusion, while SBFC Finance has delivered strong financial results, it remains cautious about the evolving economic landscape, particularly in the MSME sector. The company's proactive approach to risk management and strategic diversification is likely to play a crucial role in navigating the challenges ahead.

SBFC Finance has reaffirmed its commitment to growth, maintaining its guidance of 5-7% quarterly increase in assets under management (AUM), a benchmark it has consistently upheld for over nine quarters. This announcement comes despite facing some headwinds in specific market segments.

Credit Quality and Risk Management

The company reported a 100 basis point increase in bucket one delinquency, primarily attributed to stress in specific geographical areas and smaller ticket segments. As a result, credit costs have risen to 1.10%, with the company projecting an additional increase of 15-20 basis points from current levels.

Mahesh Dayani, Executive Director of SBFC Finance, addressed these challenges, stating that the company had anticipated this increase and remains well-prepared to navigate the situation.

Growth and Performance Metrics

Despite the challenges, SBFC Finance demonstrated robust growth in key areas:

• Assets grew by 7.00% quarter-on-quarter
• Pre-provisioning operating profit increased by 9.00%
• Achieved over ₹800.00 crore in disbursals

Strategic Adjustments

In response to the current market conditions, SBFC Finance is implementing strategic measures:

1. Distribution Optimization: The company plans to curtail 15-20% of its distribution channels. However, it expects the remaining 75-80% to continue driving growth.

2. Strengthened Underwriting: SBFC Finance has enhanced its underwriting process, with 87-88% of customer acquisitions now having credit scores above 700. The company is considering further tightening this to 90%.

Future Outlook

Despite the planned reduction in distribution channels, SBFC Finance maintains an optimistic outlook:

• Expects 20.00% growth in disbursals
• Projects 25.00% growth in AUM, even without expansion

These projections underscore the company's confidence in its core business model and its ability to navigate the current financial landscape effectively.

The management's proactive approach to addressing credit quality concerns while maintaining growth targets reflects SBFC Finance's strategic balance between expansion and risk management in the evolving financial services sector.