December 08, 2022

Unity Small Finance Bank Limited: Ratings reaffirmed; Ratings reaffirmed and
withdrawn for matured/redeemed instruments
Summary of rating action
Previous Rated Current Rated
Instrument* Amount Amount Rating Action
(Rs. crore) (Rs. crore)
Issuer Rating - - [ICRA]A- (Stable); reaffirmed
Non-convertible Debenture 10.00 10.00 [ICRA]A- (Stable); reaffirmed
Bank Facilities (LT/ ST – Fund based) 133.10 133.10 [ICRA]A- (Stable)/[ICRA]A1; reaffirmed
45.80 0.00 [ICRA]A- (Stable)/[ICRA]A1; reaffirmed and
Bank Facilities (LT/ ST – Fund based)
withdrawn
Certificate of Deposit 25.00 25.00 [ICRA]A1; reaffirmed
Total 213.90 168.10
*Instrument details are provided in Annexure I

Rationale
The rating action factors in the established presence of Unity Small Finance Bank Limited’s (Unity SFB) promoter group in the
financial services industry, the bank’s healthy upfront capitalisation and favourable liquidity profile, supported by the
staggered payout schedule for the deposits of the erstwhile PMC Bank and the relaxations provided by the Reserve Bank of
India (RBI) on priority sector lending (PSL) norms, timeline for the initial public offering (IPO), etc. While reaffirming the ratings,
ICRA continues to take cognisance of the expectation of losses for Unity SFB over the medium term, given the high operating
expenses in early stages, the costs on account of the merger with PMC Bank, and incremental credit costs if required. In this
regard, the accounting treatment of the fair valuation of the assets and liabilities of the erstwhile PMC Bank would have a
bearing on the future profitability and capitalisation.

Unity SFB’s ability to build a healthy deposit franchise would be critical to realise its growth plans and would remain important
for its earnings trajectory. Nonetheless, the healthy on-balance sheet liquidity, coupled with the favourable liability maturity
profile, provides the bank with the ability to fund growth over the near term while it builds its deposit base. Its ability to scale
up its operations while maintaining a healthy asset quality would remain critical from a credit perspective. The ratings also
factor in the risks associated with the unsecured nature of microfinance loans, which is likely to remain a focus area for the
bank for growth as well as to meet its priority sector lending (PSL) targets. ICRA also notes that the reported gross non-
performing assets (GNPAs) and net NPAs (NNPAs) stood high, despite the high provisioning coverage ratio.

The Stable outlook on the long-term rating reflects ICRA’s expectation that the bank will be able to grow its liability base,
improve its scale of operations and report profitable operations after the next couple of years. The outlook also factors in the
requisite capital-raising plans to offset the interim losses and to fund the growth.

The outstanding ratings on the Rs. 45.80-crore bank facilities have been reaffirmed and withdrawn as there is no amount
outstanding against the said facility and in accordance with ICRA’s policy on the withdrawal of credit ratings.

Key rating drivers and their description

Credit strengths

Established presence of promoters in financial services industry – Centrum Group, comprising Centrum Capital Limited (CCL;
the holding company of the Group) and its subsidiaries, is a diversified financial services provider with a presence in fee-based

www.icra .in
Page | 1
 businesses such as investment banking, broking, wealth management, insurance broking and asset management. The Group
has an established position in debt capital markets with a clientele across public sector units, banks, state-level undertakings,
private corporates and various provident funds. It ventured into the distribution of insurance products and the asset
management business in FY2018. It also has a small equity broking operation under Centrum Broking Limited. In FY2019, the
Group shifted its focus to grow the fund-based businesses and set up a non-banking financial company (NBFC; Centrum
Financial Services Limited; CFSL), a housing finance company (Centrum Housing Finance Limited; CHFL) and a microfinance
institution (Centrum Microcredit Limited; CML).

Resilient Innovations Private Limited (RIPL)/BharatPe (49% stake in Unity SFB) is a fintech company that provides services like
payment solutions and financing solutions to small merchants and kirana store owners. It is expected to bring in technology
support to help set up the platform for Unity SFB’s digital bank plans.

Comfortable capital position – Unity SFB is promoted by the consortium of Centrum Group and RIPL. The RBI granted in-
principle approval to CFSL, to set up a small finance bank (SFB), under the general guidelines for the on-tap licensing of SFBs
in the private sector, as a part of the revival/reconstruction of PMC Bank in June 2021; the licence to set up the SFB was issued
in October 2021. As a part of this transaction, the entire business (assets and liabilities) of CFSL and CML was transferred to
Unity SFB via a slump sale. BharatPe acquired a 49% stake in Unity SFB while CFSL holds a 51% stake.

Unity SFB commenced active operations from November 1, 2021 with an upfront equity base of Rs. 1,105.10 crore. Thereafter,
PMC Bank was amalgamated with Unity SFB in accordance with the RBI’s scheme for the recovery/resolution of the same. ICRA
notes that the fair valuation of the assets and liabilities has ensured a matched balance sheet and asset-liability management
(ALM) profile and has been accretive from a capital adequacy perspective. As on March 31, 2022, Unity SFB had a comfortable
capitalisation profile with a total capital-to-risk weighted assets ratio (CRAR) of 63.71% (Tier 1 ratio of 38.77%) against the
regulatory requirement of 15%. However, it is noted that the capital adequacy is supported by the relaxations provided by the
RBI in terms of inclusion of certain restructured and fair valued liabilities in the total CRAR. Nonetheless, the Tier 1 ratio of
38.77% is comfortable, though the capitalisation level would be a key monitorable going forward, considering the envisaged
portfolio growth and the estimated losses in the initial years. The promoters have committed to infuse Rs. 1,900 crore of
capital in the bank over the next few years, as and when required.

Favourable liquidity profile supported by staggered payout schedule – The depositor's settlement plan has staggered the
liabilities over a 10-year period, which supports the bank’s ALM profile. As per the scheme of amalgamation released by the
RBI, deposits up to Rs. 5 lakh to all eligible depositors would be paid upfront and will be funded through the proceeds from
Deposit Insurance and Credit Guarantee Corporation (DICGC). The bank received funds aggregating Rs. 3,830 crore from DICGC,
of which Rs. 2,590 crore has already been settled to PMC Bank’s depositors while the rest was retained as of July 07, 2022.
Unity SFB has retained the same in the form of current account savings account (CASA) deposits or redeployed it in fixed
deposits. The payout to DICGC is to be made over a 20-year period. This long maturity profile gives Unity SFB the flexibility to
plan and phase the payments as per cash accruals.

The bank’s liquidity coverage ratio was healthy at 677.9% as on September 30, 2022, with statutory liquidity ratio (SLR)
investments of Rs. 1,860 crore and non-SLR investments of Rs. 845 crore. Its structural liquidity statement (SLS) as on March
31, 2022 did not have negative cumulative mismatches in any bucket for up to one year, even under the stressed scenario of
90% collection efficiency on advances. As of March 31, 2022, it had grandfathered borrowings (excluding deposits) of Rs. 1,128
crore, which declined to Rs. 272 crore as of September 30, 2022.

Credit challenges

Modest scale of operations; expansion under new business model while maintaining healthy asset quality would remain
critical – As of September 30, 2022, Unity SFB’s gross loan book stood at Rs. 6,768 crore and the net loan book was Rs. 3,148
crore. Comparatively, its gross loan book was Rs. 5,996 crore, while the net loan book stood at Rs. 2,419 crore as on March 31,

www.icra .in
Page | 2
 2022 with microfinance loans (inclusive banking) forming 29% of the overall net loan book. Small and medium-sized enterprise
(SME)/micro, small and medium enterprise (MSME) and supply chain finance loans (business banking) formed 47% of the
overall net loan book. PMC Bank’s legacy loan book accounted for the balance. Going forward, the bank would be focusing on
MSME lending, inclusive banking, loan against property, unsecured business loans, supply chain finance, digital finance and
working capital loans. BharatPe is also expected to play a transactional role in Unity SFB, which would help it scale up its loans
and deposits.

As of September 30, 2022, the GNPA ratio stood at 56.29% and the NNPA ratio stood at 5.95%. The bank’s ability to
incrementally maintain healthy asset quality in the existing CFSL and CML portfolios, manage the stress from PMC Bank’s
portfolio and keep the credit costs under control would be critical. Unity SFB’s ability to grow as well as diversify its portfolio
and reduce geographical concentration while maintaining the asset quality would be a key monitorable for its credit profile.

Profitability expected to remain subdued in the near to medium term – Unity SFB is expected to report losses over the
medium term, given the high operating expenses typical in early stages, costs on account of the merger with PMC Bank, and
incremental credit costs if required. The accounting treatment of the fair valuation impact of the assets and liabilities of the
erstwhile PMC Bank would have further bearing on the reported profitability. Unity SFB reported a net loss of Rs. 99 crore in
H1 FY2023. It had reported a net loss of Rs. 150 crore during November 1, 2021 to March 31, 2022.

Ability to develop granular deposit base and achieve sustained improvement in liability profile would be key for future
growth plans – Unity SFB started its operations from November 1, 2021. The fresh term deposit accretion is modest at
approximately Rs. 720 crore as of October 30, 2022, raised during the last seven months, as the bank is upgrading its
information technology systems before launching a deposit mobilisation drive. It has 111 branches at present (110 PMC Bank
branches and 1 non-PMC Bank branch) and 145 offices. In the next four years, the management aims to increase the number
of branches to 288. Initially, the plan is to optimise/refurbish the existing branches. Following this, the bank would start adding
branches in the existing locations and then in new locations. It is focusing on various strategies to retain the existing depositors
as well as attract new customers to enhance its deposit base. It received scheduled bank status in July 2022. Its ability to build
its CASA deposits and retail fixed deposits base would be critical to realise its expansion plans and would thus remain important
from a credit perspective.

Ability to manage political, communal and other risks in microfinance sector, given the marginal borrower profile with high
susceptibility to income shocks – As a sizeable portion of Unity SFB’s portfolio comprises microfinance loans, the portfolio
remains vulnerable to asset quality shocks as witnessed after demonetisation and during the Covid-19 pandemic. The ratings
factor in the risks associated with unsecured lending to marginal borrowers with limited ability to absorb income shocks and
the rising borrower leverage levels owing to an increase in multiple lending in the areas of operations. The microfinance
industry is prone to socio-political, climatic and operational risks, which could negatively impact the bank’s operations and
thus its financial position. Unity SFB’s ability to onboard borrowers with a good credit history and recruit and retain employees
while scaling up its operations would be key for managing high growth rates.

Liquidity position: Strong

The depositor's settlement plan has staggered the liabilities over a 10-year period, which supports the bank’s ALM profile. As
per the scheme of amalgamation released by the RBI, deposits up to Rs. 5 lakh to all eligible depositors would be paid upfront
and will be funded through the proceeds from DICGC. The bank received funds aggregating Rs. 3,830 crore from DICGC, of
which Rs. 2,590 crore has already been settled to PMC Bank’s depositors while the rest was retained as of July 07, 2022. Unity
SFB has retained the same in the form of CASA deposits or redeployed it in fixed deposits. The payout to DICGC is to be made
over a 20-year period. This long maturity profile gives Unity SFB the flexibility to plan and phase the payments as per cash
accruals.

www.icra .in
Page | 3
 The bank’s liquidity coverage ratio was healthy at 677.9% as on September 30, 2022, with SLR investments of Rs. 1,860 crore
and non-SLR investments of Rs. 845 crore. Its SLS as on March 31, 2022 did not have negative cumulative mismatches in any
bucket for up to one year, even under the stressed scenario of 90% collection efficiency on advances. As of March 31, 2022, it
had grandfathered borrowings (excluding deposits) of Rs. 1,128 crore, which declined to Rs. 272 crore as of September 30,
2022.

Rating sensitivities

Positive factors – ICRA could revise the outlook to Positive or upgrade the long-term rating if Unity SFB is able to build a
granular liability franchise while improving its funding cost and profitability. Diversifying the asset mix, while scaling up and
maintaining the asset quality, and a prudent capitalisation profile will remain imperative.

Negative factors – Pressure on the bank’s ratings could arise on account of a longer-than-expected path to profitability, leading
to pressure on the capitalisation profile. The weakening of the liquidity profile could also exert pressure on the ratings. Inability
to demonstrate traction in the liability franchise will also be a credit negative.

Analytical approach

Analytical Approach Comments

ICRA's Credit Rating Methodology for Non-banking Finance Companies
Applicable rating methodologies Rating Methodology of Banks
ICRA Policy on Withdrawal of Credit Ratings
Parent/Group support Not applicable
Consolidation/Standalone Standalone

About the company

Unity SFB is the 12th SFB in India, promoted by the consortium of Centrum Group along with Resilient Innovations Private
Limited (RIPL or BharatPe, a fintech company). The RBI granted in-principle approval to CFSL, to set up an SFB under the general
guidelines for the on-tap licensing of SFBs in the private sector, as a part of the revival/reconstruction of PMC Bank in June
2021. The licence to set up the SFB was issued in October 2021.

BharatPe acquired a 49% stake in Unity SFB while CFSL holds 51%. Further, as a part of this transaction, the entire business
(assets and liabilities) of CFSL and CML was transferred to Unity SFB via a slump sale. CFSL serves as the holding company for
Unity SFB with no other operations. Currently, Unity SFB primarily has the already existing SME/MSME/supply
chain/microfinance asset base of CFSL and CML and receives digital platform and technology support from BharatPe. Unity
SFB commenced active operations from November 1, 2021 with an upfront equity base of Rs. 1,105 crore. As the second leg
of this transaction, PMC Bank was amalgamated with Unity SFB in accordance with the RBI’s scheme for the
recovery/resolution of the same. This was completed on January 24, 2022.

Key financial indicators (proforma)

Q1 Q2
Unity Small Finance Bank Mar 31, 2021 Nov 1, 2021 Mar 31, 2022 FY2023/Jun FY2023/Sep
30, 2022 30, 2022
Total income NA NA 154 126 210
Profit after tax NA NA (150) (92) (7)
Net worth (reported) NA 1,105 1,914 1,813 1,797
Loan assets NA 1,264 2,419 2,809 3,148
Total assets NA 2,477 10,811 8,032 7,603
Return on assets NA NM NM NM NM

www.icra .in
Page | 4
 Q1 Q2
Unity Small Finance Bank Mar 31, 2021 Nov 1, 2021 Mar 31, 2022 FY2023/Jun FY2023/Sep
30, 2022 30, 2022
Return on equity NA NM NM NM NM
Gearing (including deposits; times)* NA 1.21 2.57 1.21 1.03
Gross NPA NA NA 62.94% 59.40% 56.29%
Net NPA NA NA 8.14% 7.42% 5.95%
CRAR NA NA 63.71% 58.91% 62.75%
Source: Unity SFB, ICRA Research; All ratios as per ICRA’s calculations; NM – Not meaningful; NA – Not available; *Gearing does not include the restructured
deposit liabilities of Rs. 2,377 crore and interest accrued but not due of Rs. 126 crore as of March 31, 2022
Amount in Rs. crore

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

www.icra .in
Page | 5
 Rating history for past three years

Chronology of Rating History

Current Rating (FY2023)
for the Past 3 Years
Amount Date & Date &
Instrument Amount
Outstanding as Date & Rating Date & Rating in FY2022 Rating in Rating in
Rated
Type of Dec 02, 2022 FY2021 FY2020
Dec 17, Dec 14,
(Rs. crore) (Rs. crore) Dec 08, 2022 Sep 09, 2022 Aug 05, 2022 Dec 29, 2021 - -
2021 2021
Long [ICRA]A- [ICRA]A- [ICRA]A-
1 Issuer Rating NA NA [ICRA]A- & - - - -
Term (Stable) (Stable) (Stable)
Non- [ICRA]A- & [ICRA]A-
Long [ICRA]A- [ICRA]A- [ICRA]A-
2 convertible 10 10 [ICRA]A- & & - -
Term (Stable) (Stable) (Stable)
Debenture
Bank Facilities Long/ [ICRA]A- [ICRA]A- [ICRA]A-
[ICRA]A- &/
3 (LT/ ST – Fund Short 133.10 68 (Stable)/ (Stable)/ (Stable)/ - - - -
[ICRA]A1 &
based) Term [ICRA]A1 [ICRA]A1 [ICRA]A1
[ICRA]A-
Bank Facilities Long/ [ICRA]A- [ICRA]A-
(Stable)/ [ICRA]A- &/
4 (LT/ ST – Fund Short 45.80 0 (Stable)/ (Stable)/ - - - -
[ICRA]A1; [ICRA]A1 &
based) Term [ICRA]A1 [ICRA]A1
withdrawn
Certificate of Short [ICRA]A1
5 25 0 [ICRA]A1 [ICRA]A1 [ICRA]A1 [ICRA]A1 & [ICRA]A1& - -
Deposit Term &
Commercial [ICRA]A1+
Short [ICRA]A1+(C
6 Paper - - - - - (CE); - - -
Term E)
Programme withdrawn
& - Under rating Watch with Developing Implications; NA – Not applicable

www.icra .in
Page | 6
 Complexity level of the rated instruments

Instrument Complexity Indicator

Certificate of Deposit Very Simple

Non-convertible Debenture Simple

Bank Facilities (LT/ ST – Fund based) Simple

Issuer Rating Not applicable

The Complexity Indicator refers to the ease with which the returns associated with the rated instrument could be estimated.
It does not indicate the risk related to the timely payments on the instrument, which is rather indicated by the instrument's
credit rating. It also does not indicate the complexity associated with analysing an entity's financial, business, industry risks or
complexity related to the structural, transactional or legal aspects. Details on the complexity levels of the instruments are
available on ICRA’s website: Click Here

www.icra .in
Page | 7
 Annexure I: Instrument details
Date of
Maturity Amount Rated Current Rating and
ISIN Instrument Name Issuance / Coupon Rate
Date (Rs. crore) Outlook
Sanction
Certificate of
Not issued NA NA NA 25.00 [ICRA]A1
deposit
INE0J1607016 NCD Jun 29, 2020 10.60% Jun 29, 2023 10.00 [ICRA]A- (Stable)
NA Bank facilities –
[ICRA]A-
Term loan/ Sep 12, 2021 Not available Aug 01, 2024 38.97
(Stable)/[ICRA]A1
WCDL/OD
NA Bank facilities –
[ICRA]A-
Term loan/ Aug 05, 2021 Not available Aug 10, 2024 48.00
(Stable)/[ICRA]A1
WCDL/OD
NA Bank facilities –
[ICRA]A-
Term loan/ Oct 08, 2021 Not available Oct 21, 2023 45.83
(Stable)/[ICRA]A1
WCDL/OD
NA Bank facilities – [ICRA]A-
Term loan/ NA NA NA 45.80 (Stable)/[ICRA]A1;
WCDL/OD withdrawn
Bank facilities – [ICRA]A-
NA NA NA NA 0.30
Unallocated (Stable)/[ICRA]A1
NA Issuer rating NA NA NA NA [ICRA]A- (Stable)
Source: Unity SFB; NA – Not applicable

Annexure II: List of entities considered for consolidated analysis: Not applicable

www.icra .in
Page | 8
 ANALYST CONTACTS
Karthik Srinivasan Deep Inder Singh
+91 22 6114 3444 +91 124 45 45 830
karthiks@icraindia.com deep.singh@icraindia.com

Sainath Chandrasekaran Jatin Arora

+91 22 6114 3439 +91 124 45 45 846
sainath.chandrasekaran@icraindia.com jatin.arora@icraindia.com

RELATIONSHIP CONTACT
Jayanta Chatterjee
+91 80 4332 6401
jayantac@icraindia.com

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani
Tel: +91 124 4545 860
communications@icraindia.com

Helpline for business queries

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)

info@icraindia.com

About ICRA Limited:

ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services
companies as an independent and professional investment Information and Credit Rating Agency.

Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company,
with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency
Moody’s Investors Service is ICRA’s largest shareholder.

For more information, visit www.icra.in

www.icra .in
Page | 9
ICRA Limited

Registered Office
B-710, Statesman House, 148, Barakhamba Road, New Delhi-110001
Tel: +91 11 23357940-45

Branches

© Copyright, 2022 ICRA Limited. All Rights Reserved.

Contents may be used freely with due acknowledgement to ICRA.
ICRA ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. ICRA ratings are subject to a process of surveillance,
which may lead to revision in ratings. An ICRA rating is a symbolic indicator of ICRA’s current opinion on the relative capability of the issuer concerned to
timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icra.in or contact any ICRA office for the latest
information on ICRA ratings outstanding. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable,
including the rated issuer. ICRA however has not conducted any audit of the rated issuer or of the information provided by it. While reasonable care has been
taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any kind, and ICRA in particular, makes no
representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. Also, ICRA or any of its group
companies may have provided services other than rating to the issuer rated. All information contained herein must be construed solely as statements of
opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents.