Money & Banking

Small Banks will need to raise up to Rs 3,900 cr till FY2022: ICRA

Our Bureau Mumbai | Updated on November 11, 2019 Published on November 11, 2019

Small Finance Banks (SFBs) will need external capital of Rs 2,600-Rs 3,900 crore till FY2022 to meet growth aspirations as well as comply with regulatory regulations of mandatory listing after reaching net worth of Rs 500 crore and reducing promoter shareholding, according to credit rating agency ICRA.

The agency assessed that the overall capitalisation levels of SFBs remained comfortable supported by capital infusion of approximately Rs. 2700 crore in FY2019 (Rs. 890 crore in FY2018).

As on March 2019, eight of the 10 SFBs had crossed net worth of Rs 500 crore and only one SFB is listed at present.

Part of the external capital requirement could be met through Initial Public Offerings (IPO) in line with regulatory requirements, said Supreeta Nijjar, Vice President and Sector Head , Financial Sector Ratings.

The agency, in a report, said that SFBs reported robust annualised growth of 41 per cent in the assets under management (AUM) in FY2019 to Rs. 67,000 crore (against 5 per cent growth in FY2018).

Their asset quality indicators also improved with gross non-performing assets (NPA) at 2.5 per cent as on March 31, 2019 (9.5 per cent as on March 31, 2018) supported by lower slippages on the new book and write-offs related to the legacy demonetisation related slippages.

Good times to continue

Nijjar expects the good times for SFBs to continue and grow by 25-30 per cent over the medium term, overall.

The fact that they have been able to diversify into retail asset classes such as vehicle loans, business loans, loan against property (LAP) and housing finance augurs well from a growth perspective as well as mitigating risks, she added.

Diversification has enabled SFBs to reduce their microfinance portfolio from over 60 per cent as on March 31, 2017 to 41 per cent as on March 31, 2019.

Deposit mobilisation

SFBs have also made good progress on deposit mobilisation with deposits accounting for 63 per cent of the borrowings (including off-balance sheet borrowings), as on March 31, 2019, the agency said.

While the focus continues to be on bulk deposits, the gradual improvement in the retail deposit franchise has helped reduction in the share of top 20 depositors in overall deposits to 28 per cent as on March 31, 2019 from 52 per cent as on March 31, 2018.

On the liquidity front, ICRA assessed that SFBs have been able to maintain a favourable asset liability maturity profile supported by shorter-tenor assets, high share of non-callable deposits raised by them and rise in long term funding from refinance institutions.

Further, like other scheduled commercial banks (SCBs), SFBs are eligible for additional liquidity support including interbank limits and have access to the call money market as well. While these factors support the near-term liquidity position, ability to develop a strong franchise and hence, a retail deposit base, is critical from a long-term perspective.

Portfolio yields

Owing to the focus of SFBs on higher-yielding asset classes, portfolio yields and net interest margins continue to be higher than that of SCBs. Net interest margins (NIMs) have improved owing to high lending yields and reduction in cost of funds as share of deposits in overall borrowings has increased, according to the agency’s report.

The setting up and upgradation of existing branches, systems upgradation, and the hiring of manpower have kept the operating expense ratios high.

“If we were to exclude one player where impact of demonetisation on credit costs was higher, profitability indicators improved with ROEs (return on equity) improving from 3.9 per cent in FY2018 to 12.4 per cent in FY2019,” the report said.

ICRA expects SFBs (excluding one player) to report RoE of 12-14 per cent in FY2020, supported by some reduction in the cost of funds as well as the operating expense ratios. It observed that focus on product diversification would further enable the SFBs to deepen their relationship with existing customers and manage concentration risk better.

Published on November 11, 2019
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