Money & Banking

Small banks will need to mobilise ₹60k crore in deposits in FY21: Ind-Ra

Our Bureau Mumbai | Updated on December 12, 2019

Small finance banks (SFBs) would need to mobilise around ₹60,000 crore in deposits over FY20-21 to support an annual growth asset of 30 per cent and to maintain borrowings at 25 per cent of the liabilities, according to India Ratings and Research (Ind-Ra).

SFBs will continue to see increased traction in deposits on the back of higher interest rates (1-2 per cent higher than most banks), focussed marketing strategies, and maturing branches of a fast growing branch network (40 per cent growth in branches in FY19), the credit rating agency said in a report.

The total deposits of SFBs jumped 130 per cent year-on-year (yoy) in FY19, leading to an increase in the share of deposits to 59.6 per cent of non-equity liabilities in FY19 (37.6 per cent in FY18). SFBs incrementally mobilised deposits of ₹28,850 crore in FY19.

Low-Cost CASA Deposits Continue to be a Challenge

The report assessed that although CASA (low-cost deposits) increased 76 per cent yoy to ₹9,760 crore in FY19, the ratio has seen a decline to 19.2 per cent (25 per cent), as traction in term deposits increased and savings deposits were converted to term deposits owing to the high rates offered by SFBs.

Ind-Ra opined that the building of a CASA (current account, savings account) franchise depends on factors such as developing long-term customer relationships, ensuring ease of transactions, fostering trust in the brand, having a large branch network etc.

Large commercial banks benefit from vintage, resulting in deposits from large corporates, government departments (all state, local bodies, etc), trusts schools and hospitals, businessmen and customers whose incomes have grown with the banks over many decades. As a result, gathering CASA, especially CA, is a challenge for SFBs.

Capital Market Penetration Limited

The report observed that the total borrowings of SFBs declined steadily over the last two years to ₹31,500 crore in FY19 (FY18: ₹34,000 crore; FY17: ₹36,000 crore), with a substantial, albeit expected, decline in bank borrowings and debenture funding (grandfathered loans). This decline was accompanied by a rise in refinance by policy institutions. The share of policy institutions increased to 43 per cent in total borrowings in FY19 from 15 per cent in FY17.

"However, capital market borrowings present a different picture. Given the overall liquidity stress in short-term capital markets, elevated risk perception and risk aversion, especially for credits rated in the ‘A’ category and below’, SFBs might face challenges in tapping the capital markets," Ind-Ra said.

On a cumulative basis, SFBs raised about ₹1,900 crore of CDs (certificate of deposits) from December 2018 to mid-November 2019, with a weighted average tenor of 37 days.

Changing Asset Mix

The assets under management (AUM) of SFBs reached ₹70,000 crore in FY19, reporting a yoy growth rate of 48 per cent and a CAGR of 32 per cent over FY17-19.

For SFBs with microfinance vintage (AUM of ₹44,700 crore in FY19), the micro finance loan book grew by 28 per cent yoy, while the non-microfinance book grew 75 per cent. Consequently, the share of the non-microfinance book in the AUM increased to 29 per cent in FY19 (FY18: 23 per cent; FY17: 14 per cent).

However, microfinance loans still account for a significant proportion of the consolidated loan book of SFBs, exposing them to socioeconomic and political risks, along with natural disaster-related risks on the asset side, noted the agency.

"However, most SFBs have grown their secured loan portfolio substantially, which partially offsets the overall risk exposure through asset diversification, and therefore, they might suffer lower losses given default," Ind-Ra said.

The agency expects the share of the microfinance loan book to decline gradually in the near-to-medium term to about 60 per cent, as SFBs with microfinance origin would maintain their focus on growing their non-MFI portfolio.

Published on December 12, 2019

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