Home >Industry >Banking >Small finance banks will require 5,000-6,000 cr equity infusion for 15-20% CAGR by 2023: Icra
SFBs have made good progress on deposit mobilisation, with 70% of their borrowings being through deposits as on March 31, 2020 (Photo: AP)
SFBs have made good progress on deposit mobilisation, with 70% of their borrowings being through deposits as on March 31, 2020 (Photo: AP)

Small finance banks will require 5,000-6,000 cr equity infusion for 15-20% CAGR by 2023: Icra

The industry is expected to report losses at consolidated level in the current fiscal driven by high operating costs and elevated credit costs of around 3.5-4%, the report said

Small finance banks (SFBs) may need an equity infusion of close to 5,000-6,000 crore for the industry to attain a compound annual growth rate (CAGR) of 15-20% till FY2023 and to absorb losses, Icra said in a report.

The industry is expected to report losses at consolidated level in the current fiscal driven by high operating costs and elevated credit costs of around 3.5-4%, the report said.

"SFBs may require an equity infusion of around 5,000-6,000 crore for industry to achieve a CAGR of 15-20% till FY2023 and to absorb expected losses and maintain gearing levels at 7-8 times," Icra said.

The rating agency's vice president and sector head (financial sector ratings) Supreeta Nijjar said external capital will be needed not only to manage COVID-19 related credit costs and medium-term growth but also to manage regulations related to reducing promoter shareholding below 40%.

Currently, eight out of 10 SFBs are yet to comply with the requirement of bringing down promoter shareholding to 40% within five years of commencement of banking operations, she said.

"Additionally, SFBs are required to list themselves on the stock exchanges within three years of reaching a net worth of 500 crore and some SFBs are approaching the three-year timeline in FY2021," Nijjar added.

The rating agency said growth in assets under management (AUM) of domestic SFBs is projected to more than halve to 10-15% for FY21 as compared to a growth of 30% in FY20.

The total asset base of SFBs crossed 1,30,000 crore as on March 31, 2020 and AUM crossed 90,000 crore with a growth of 30% in FY20, helped by continued healthy traction on resource mobilisation.

SFBs have made good progress on deposit mobilisation, with 70% of their borrowings being through deposits as on March 31, 2020.

While deposit growth and stability has been good, SFBs still need to build low cost deposit base as a large portion of deposits comprises bulk deposits and the share of CASA deposits remained low at 16% as on March 31, 2020, Icra said.

Their interim funding requirements have been met from funding from refinancing institutions like SIDBI, NABARD and MUDRA, which accounted for 24% of their borrowings as on March 31, 2020.

It has also led to a favourable asset liability maturity profile with shorter-tenor assets, high share of non-callable deposits and rise in long-term funding from refinance institutions, the report said.

"While bulk deposits and funding from refinancing institutions support the near-term liquidity position, SFBs' ability to develop a strong franchise and hence, a stable retail deposit base, is critical from a long-term perspective," Nijjar added.

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