SFBs lead other banks groups on profitability & asset quality

Apreliminary analysis by RBI based on data sheds light on various aspects of SFBs’ functioning. The salient findings of the study, titled `Performance of Small Finance Banks – An Early Reflection’ are very interesting. The RBI released guidelines for licensing of SFBs during 2014-15 to promote differentiated banks to cater to niche requirements. This was aimed at furthering the financial inclusion objective by provision of savings vehicles primarily to unserved and underserved sections of the population, and supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganized sector entities, through high-tech and low-cost operations.

EMPIRICAL RESULTS

The SFBs have been in operation for over 3 years at the time of this study. A total of 10 SFBs has been operating in India at the time of the study, although they started operations at different time points. The empirical results based on quarterly data spanning from March 2017 to March 2020 indicate that bank-level factors like efficiency, leverage, liquidity and banking business are significant in determining SFBs’ profitability during this early period of operation.

HIGHER PSL, CD RATIO

All the SFBs have achieved priority sector target of 75% of ANBC. Preliminary analysis reveals SFBs to be leading in serving the priority sector. High credit deposit (CD) ratio is observed for SFBs compared to other bank groups, implying a high conversion rate of available funds into lending activity. Share of priority sector advances of SFBs considerably higher vis-a-vis other traditional banking groups. Both the growth rate of deposits and credit of SFBs is generally high also due to small base.

HIGHEST SHARE: SEMI-URBAN

Out of total number of bank branches, semi-urban constitutes the highest share of branches at around 39% in March 2020 for SFBs. Rural and semi-urban regions that draws special attention of policy makers for financial inclusion drives, together comprise a share of 57% in March 2020. Although, this share is lower as compared to 61% for PSBs, which have a better coverage in rural sections.

The share of branches across population groups has been relatively similar since March 2018. Around 30% of the total branches of SFBs are situated in southern India followed by around 20% each in Northern and Western regions. It conveys that SFBs have more prominence in southern regions, which may not be surprising due to the fact that many SFBs are active in southern India.

ASSET SIZE: LARGEST, SMALLEST

The 10 SFBs are coded as SFB1, SFB2, …, SFB10 consistently throughout. Largest bank in terms of asset size is SFB1 at `420.64 billion, followed by SFB3 at `193.15 bn in March 2020. SFB1 alone comprises a share of around 32% compared to all SFBs in terms of total assets. At the other end, SFB7, SFB2, SFB8 are the smallest SFBs with total assets size less than `60 bn. The share of advances forms the predominant portion of asset portfolio of SFBs’ assets, followed by investments.

Turning to the liability side of SFBs, SFB9 occupies the highest share of capital at 36% followed by SFB3 at 22% of the gross capital of SFBs in March 2020. While, on the deposit side, SFB1 occupies the largest segment at 32% followed by SFB3 and SFB9 at 13% each for the same period.

PROFIT MARGIN, ROE, ROA

Profitability and assets quality figures for SFBs are also better in contrast to other bank groups. On the contrary, profitability measures are in negative zone for public sector bank group. All the profitability ratios - profit margin, ROE & ROA - display improvements as per the median measure of central tendency. But the mean of profitability ratios has sharply dipped in September 2018 with an inflated standard deviation. Moreover, only 5 SFBs were operational in March 2017 that increased to 10 in September 2018 contributing to higher dispersion. The aggregate size as measured by total assets has roughly increased both in terms of mean and median. Median efficiency has improved from 75% in March 2017 to 66% in March 2020.

PROMINENT LIABILITY INDICATORS

Broadly, both liquidity and banking business have enhanced both in terms of median and mean from September 2018 to March 2020 with reduced variability. Overall, the results reflect relative importance of banks’ intrinsic factors like efficiency, leverage, liquidity and banking business for profitable operations.