Mumbai: Small Finance Banks (SFBs), the newest entrant in the banking space continue to witness strong growth on various parameters such as assets under management, deposit mobilisation, liquidity position, bad loan reduction and return on equity. Going forward SFBs would need external capital in the range of Rs 2,600 to Rs 3,900 crore till FY22 not only to meet growth aspirations but also to meet regulatory regulations of mandatory listing after reaching net worth of Rs 500 crore and reducing promoter shareholding.
As on March 2019, eight of the 10 SFBs had crossed net worth of Rs 500 crore and only one SFB is listed at present. Part of this requirement could also be met through Initial Public Offerings in line with regulatory requirements said rating agency ICRA.
The assets under management (AUM) for SFBs reported annualised growth of 41 per cent in FY2019 to Rs 67,000 crore compared to 5 per cent growth in FY18. Their asset quality indicators also improved with gross non-performing asset (GNPA) at 2.5 per cent as on March 31, 2019 compared to 9.5 per cent as on March 31, 2018 supported by lower slippages on the new book and write-offs related to the legacy demonetisation related slippages.
The overall capitalisation levels of SFBs remained comfortable supported by capital infusion of approximately Rs 2,700 crore in FY19 compared to Rs 890 crore in FY18.
SFBs have also made good progress on deposit mobilisation with deposits accounting for 63 per cent of the borrowings (including off-balance sheet borrowings), as on March 31, 2019. While the focus continues to be on bulk deposits, the gradual improvement in the retail deposit franchise has helped reduction in the share of top 20 depositors in overall deposits to 28 per cent as on March 31, 2019 from 52 per cent as on March 31, 2018.
Supreeta Nijjar, vice-president and sector head, financial sector ratings at ICRA said, “We expect the good times for SFBs to continue and grow by 25-30 per cent over the medium term, overall. The fact that they have been able to diversify into retail asset classes such as vehicle loans, business loans, loan against property (LAP) and housing finance augurs well from a growth perspective as well as mitigating risks. Diversification has enabled SFBs to reduce their microfinance portfolio from over 60 per cent as on March 31, 2017 to 41 per cent as on March 31, 2019.”
Owing to the focus of SFBs on higher-yielding asset classes, portfolio yields and net interest margins continue to be higher than that of schedule commercial banks.
Net interest margins (NIMs) have improved owing to high lending yields and reduction in cost of funds as share of deposits in overall borrowings has increased.
However, the setting up and upgradation of existing branches, systems upgradation, and the hiring of manpower have kept the operating expense ratios high.
According to Nijjar, if one were to exclude one player where impact of demonetisation on credit costs was higher, profitability indicators improved with return on equity improving from 3.9 per cent in FY18 to 12.4 per cent in FY19.
ICRA expects SFBs (excluding one player) to report RoE of 12-14 per cent in FY20, supported by some reduction in the cost of funds as well as the operating expense ratios. Focus on product diversification would further enable the SFBs to deepen their relationship with existing customers and manage concentration risk better.
On the liquidity front, SFBs have been able to maintain a favourable asset liability maturity profile supported by shorter-tenor assets, high share of non-callable deposits raised by them and rise in long term funding from refinance institutions. Further, like other scheduled commercial banks (SCBs), SFBs are eligible for additional liquidity support including interbank limits and have access to the call money market as well. While these factors support the near-term liquidity position, ability to develop a strong franchise and hence, a retail deposit base, is critical from a long-term perspective said ICRA.
