Small Finance Banks (SFBs) may need to focus on their bottomlines as and when financial conditions tighten, according to a Reserve Bank of India (RBI) report.

The “Report on Trend and Progress of Banking in India 2019-20” observed that the prevailing easy liquidity conditions facilitate borrowings and refinance on which SFBs rely. Currently, there are 10 SFBs in the country.

The central bank said the risk absorption cushions in the form of provision coverage ratio (PCR) is low in some SFBs, impacting their ability to withstand adverse shocks.

The report said those SFBs, which were earlier NBFC micro finance institutions (NBFC-MFIs), continue to have significant exposure to unsecured advances even as they strive to diversify their portfolio.

Green shoots in the form of revival of agriculture and allied activities may augur well for financials of these banks, it added.

The RBI noted that collection efficiency of these banks had dropped substantially during the strict lockdown period but since then there is a strong improvement on a month-to-month basis and a catch-up with pre-pandemic levels may, in fact, be under way.

In FY20, SFBs deposits jumped 48.1 per cent year-on-year (y-o-y) to ₹82,488 crore. Their loans and advances rose 29.7 per cent y-o-y to ₹90,576 crore. Investments were up 40 per cent y-o-y to ₹24,203 crore.

The RBI observed that these banks have smaller low-cost current and saving account (CASA) deposit bases.

SFBs were set up in 2016 to provide basic banking services such as accepting deposits and lending to the unserved and the under-served sections of society, including small businesses, marginal farmers, micro and small industries, and the unorganised sector.

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