Small finance banks (SFBs) have reported a 17% growth in FY2018 with assets under management (AUM) of `514.98 billion as on 31 March 2018 (26% AUM growth in FY2017), says a report from rating agency ICRA. The report said the pace of growth had slowed down in the last 2 years, the primary reason being their focus on the migration process – from NBFCs to SFBs. All the SFBs were operational by June 2018 and most of the players have managed the transition well with respect to the initial challenges identified earlier like raising of capital, diversification of liability profile, identifying and converting branches as well as diversifying the product portfolio and recruiting staff.
Supreeta Nijjar, vice president and sector head, Financial Sector Ratings, ICRA, says apart from the migration process, the growth of SFBs was also affected by the demonetization related impact on the microfinance sector. “While microfinance dominates the asset mix of SFBs, focus on product diversification has led to a reduction in the share of microfinance to 51% as on 31 March 2018 from 61% as on 31 March 2017 with the SFBs establishing their presence in retail asset classes such as vehicle loans, loans against property and housing finance. However, the share of microfinance for the erstwhile NBFC-MFIs, which converted to SFBs, stood higher at 79% as on 31 March 2018 (84% as on 31 March 2017),” she adds.
On the deposit mobilization front, the report states that SFBs have deposits forming 43% of the borrowings. Nevertheless, most of the deposits are bulk deposits/certificates of deposit. Funding from refinance institutions accounted for 20% of the borrowings, while the share of bank funding and debentures declined due to the repayment of older borrowings. The cost of funds for SFBs has reduced on the back of a higher share of funding from financial institutions and deposits, despite the rate offered on deposits being 50-100 bps higher than that offered by other full-service banks.
The report also finds that the overall capitalization levels for the SFBs have been good (net worth/managed advances of 20% as on 31 March 2018) supported by regular capital infusion by most of the entities. The SFBs raised `60 billion during FY2016 to FY2018 for meeting the regulatory norms on shareholding as well as for future growth. ICRA’s estimate is that the SFBs would require external capital of `40 billion to `60 billion (40%-60% of present net worth) till FY2022.