Home / Industry / Banking /  At 20%, small finance banks have highest return on advances

The fledgling small finance banks are paying nearly double of that of their peers paying in cost of funds at a high of 8.66%, yet maintaining the highest return on advances at close to 20% and on assets and equity in high teens than their peers, says a report.

According to an analysis of the key financial metrics of small finance banks (SFBs) by Care Ratings in comparisons to their public, private and foreign sector peers, these newest entities on the finance street are paying as much 8.20% in interest cost for deposits, which in the case public sector banks is only 4.96%, at 5.26% for private sector ones and at 3.65% for foreign banks.

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Again SFBs are paying a high 8.66% in cost of funds, as against 4.92% by public sector ones, 5.41% by private lenders and 3.73% by foreign banks.

But when it comes to return on advances, SFBs pocket a whopping net 19.87%, as against 8.16% for PSBs, 10.10% for private lenders and 8.45% for foreign lenders. Similarly, on the return on assets, the PSBs earn a minus 0.23%, private lender earn a paltry 0.51% while MNC lenders earn a lower 1.55% and the SFBs earn the highest at 1.70%.

The SFBs have the second best numbers when it comes to return on equity earning a shiny 15%, as against minus 4.16% for PSBs, a low 3.30% for private sector banks and when it comes to foreign banks they return 8.76% to their investors, according to Care Ratings based on the recent RBI report on 'trend and progress in banking'.

The 10 SFBs came into existence later 2016 with the objectives of providing a savings vehicle for the unserved sections as well as supplying credit to small businesses, marginal farmers.

These 10 SFBs have a total balance sheet of 1.33 lakh crore as of FY20 and their share in the overall banking system was an insignificant 0.7%, which was after a 58% growth in FY20, while banking as a whole inched by a paltry 8.5%.

These ten banks had core capital of 5,151 crore, reserves of 11,047 crore, and their deposits stood at RS 82,488 crore, of which term deposits were 69,823 crore.

They had a cumulative investment of 24,203 crore while the loan book was 90,576 crore from which they collectively earned an income of 19,219 crore of which interest income was 16,948 crore and the rest being other income at 2,271 crore. While they spent 17,251 crore in operating expenses, and made a provisions of 2,171 crore they earned a net income of 1,968 crore, says the report.

According to the report, SFBs pay higher price for funds because around 60% of their deposits are in the less than 1-year bucket and 37.5% in the 1-3 years bucket. The comparable figures for PSBs are 40.4% and 22.8%, respectively.

On the assets side, their loans with less than 1-year maturity were 38.1% of total and the 1-3 years bucket had a higher share of 42.4%. These numbers were 25.2% and 40.3%, respectively for PSBs.

Their net interest margin at 8.34% in FY20 as against 2.37% for PSBs, 3.42% for private banks and 3.26% for foreign banks.

These banks have also done well in maintaining the prudential standards with the highest capital adequacy ratio of 20.2 and lowest NPA ratio of 1.9, according to the report.

As against this PSBs' capital adequacy ratio stood at 12.9, for private banks this was 16.5, and for foreign one it was 17.7 but for SFBs it was high 20.2.

Again their gross NPAs were a low 1.9% as against 10.3% for PSBs, 5.5% for private lenders and 2.3% for foreign banks, according to the report.

This story has been published from a wire agency feed without modifications to the text.

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