Home Finance Small finance banks start on a strong wicket: ICRA – Economic Times

Small finance banks start on a strong wicket: ICRA – Economic Times

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Mumbai: Rating agency ICRA expects small finance banks (SFBs) to grow at a compounded annual growth rate of 25% to 30% led by diversified loan growth, deposit mobilisation, improving asset quality and better return on equity. The rating agency estimates that SFBs would require external capital of Rs. 4,000-6,000 crore till FY2023 for meeting the growth requirements, part of which will come through IPOs.

ICRA estimates that SFBs have reported an annualised growth of 33% in the assets under management (AUM) in 9M FY2019 to Rs. 64,325 crore. These banks have been able to diversify their product mix and reduce the share of microfinance loans to their total loans to 44% till December 2018 from 60% in March 2017.

Asset quality indicators of SFBs have also improved with gross NPA declining to 5.8% as on December 31, 2018 from 9.0% as on March 31, 2018. However, though diversification into relatively lower risk products and write offs for legacy loans will help in keeping asset quality in check, the quality of newer segments is yet to be tested and will vary depending on the robustness of credit underwriting, monitoring and collection frameworks of individual SFBs.

Portfolio yields of SFBs continue to be higher than scheduled commercial banks (SCBs) and cost of funds have reduced, though their deposits rates are still higher than their commercial banking counterparts.

“Also, most of the deposits are bulk deposits/certificates of deposit as the retail deposit franchise will take time to build. Although SFBs are eligible for additional liquidity support including interbank limits and have access to the call money markets like other SCBs, these factors at best support the near-term liquidity position of SFBs. Therefore, enhancement of retail deposit franchise would be a key success factor from a long-term perspective,” ICRA said.

Supreeta Nijjar, vice president, financial sector ratings at ICRA said the rating agency expects SFBs to report a return on equity of 10-13% in fiscal 2020, supported by some reduction in the cost of funds as well as the operating expense ratios. “Focus on product diversification would enable the SFBs to deepen their relationship with existing customers and manage product concentration risks better. ICRA expects the SFBs’ loan portfolio to grow at 25-30% with the share of microfinance declining to around 40% by March 2020,” Nijjar said.

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