Even as the overall deposits and advances of scheduled commercial banks (SCBs) are witnessing sluggish growth over the past two years, small finance banks (SFBs) — a relatively new yet key banking constituent — have registered a phenomenal growth by doubling the advances and tripling deposit accumulation over the same period.


It, however, needs to be noted that the growth of SFBs is also due to their smaller base prior to 2018.

The total deposits of SCBs grew 18 per cent to ₹1.36-lakh crore as of March 2020, from ₹1.14-lakh crore as of March 2018. On the other hand, the total deposits of SFBs witnessed a 200 per cent jump to ₹82,486 crore from ₹26,469 crore during the comparable period. SCBs include public and private sector banks, regional rural banks (RRBs) and foreign banks.

Although SFB deposits account for only a fraction of the overall deposits, their rapid growth is significant given that FY18 was the first year of operations for most of the players and nine out of 10 SFBs (except Capital, which was a local area bank) were non-deposit taking entities before that.

Au and Equitas are the two major players in the SFB space with a presence in many parts of the country and a huge deposit base. Equitas nearly doubled its deposit base to ₹10,788 crore as of FY20 from ₹5,603 crore in FY18 while the deposit size of Au SFB more than tripled to ₹26,163 crore from ₹7,923 crore.

The aggressive growth in deposits came at a cost. SFBs, which typically pay a very high rate of interest for FDs, saw their net interest margin (NIM) eroding over the years.

Impact on margins

For instance, the share of low-cost CASA deposits in the overall deposits of Equitas SFB fell to 21 per cent in March 2020 from 29.2 per cent in March 2018. Its NIM declined to 8.88 per cent in Q1 FY20 from 9.1 per cent in Q1 FY18. It further dropped to 8.63 per cent in Q1 FY21.

Advances rise, too

SFB advances have also almost doubled to ₹90,576 crore as of FY20 from ₹46,774 crore in FY18. On the other hand, the bank credit of SCBs increased just 20 per cent to ₹103.72-lakh crore in FY20 from ₹86.51-lakh crore in FY18.

Au SFB saw its net advances double to ₹26,992 crore as of FY20 from ₹13,312 crore in FY18 while the advances of Equitas grew nearly 80 per cent to ₹13,747 crore (₹7,707 crore) during the period. The loan book of Ujjivan SFB also grew 91 per cent to ₹14,044 crore as of March 2020 from ₹7,336 crore as of March 2018.

Eye on financial inclusion

The RBI, in 2015, issued in-principle approvals to 10 financial services providers, mostly micro-finance institutions, to function as SFBs with an objective of providing basic banking services such as accepting deposits and lending to the unserved and the under-served sections, including small businesses, marginal farmers, micro and small industries, and the unorganised sector.

Set up with financial inclusion as the core focus, SFBs are required to maintain 75 per cent of their adjusted net bank credit for priority sector lending, against the 40 per cent requirement for SCBs.

SFBs also have to maintain 50 per cent of the portfolio as loans and advances of up to ₹25 lakh.

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