No cost-of-fund benefit took the fizzle out of small finance banks

In September 2015, when the Reserve Bank of India (RBI) gave licences to 10 out of the 72 applicants for setting up small finance banks (SFBs), turning into an SFB became the aspiration for thrifty credit institutions. Eight out of the 10 licences were given to microfinance institutions (MFIs).  Three years down the line, the euphoria around SFBs has fizzled out.

There are hardly any MFIs which now seek to turn into an SFB. In September 2018, the government gave an option to urban cooperative banks (UCBs) to turn into SFBs. However, so far, none of the UCBs has come forward to seek an SFB licence, according to Subhash Gupta, chief executive of National Federation of Urban Cooperative Banks and Credit Societies.  

“As of now, no UCB has applied to become SFBs, which are more restricted in lending and need to comply with a host of banking norms, which otherwise are not applicable to UCBs,” said Gupta. 

In the financial year 2017-18, SFBs posted a collective net loss of Rs 2,020 crore, against a net profit of Rs 140 crore the previous year, according to RBI data. The gross NPA of the SFBs increased from 1.8 per cent in FY17 to 8.7 per cent in FY18. Much of the damage was because of the impact of demonetisation, debt waiver schemes and cost involved in the transition from MFIs to SFBs. 

However, what is more worrying for SFBs is the deposit mobilisation (which is below expectation), leading to a steep competition among these banks to offer high deposit rates. 

According to data from the RBI, at the end of March 2018, total deposits of SFBs were about Rs 26,500 crore, while loans and advances stood at Rs 46,600 crore. 

“While SFBs have to comply with many banking regulations, their cost of funds have not come down. They are forced to offer high deposit rates, and along with that, on an average there has been a 1.5 per cent increase in the cost of operation due to regulatory compliances,” said Rakesh Dubey, president, Micro­finance Institutions Network (MFIN). Currently, SFBs are offering term deposit rates as high as 9.25-9.50 per cent, against around 8 per cent for regular banks. Hence, the overall cost of funds for SFBs is close to 11-12 per cent, which is almost the same rate at which a high credit profile non-banking financial institution (NB­FC)-MFI can raise funds. 

However, according to SFBs, over the last few months, the NPAs have come down as demonetisation and farm loan waiver impact stabilised, and this year, the SFBs would see stronger and diversified portfolio after a year of pain. 

“It is not wise for NBFC-MFIs to not aspire to become a bank, as NBFCs themselves are facing a lot of problems, and as SFBs we are supporting them. We came out of the painful phase last year, and now we will focus on building the bank. Also, profitability of an NBFC-MFI cannot be compared with an SFB, as MFI lending is one of the most profitable segments. However, it is totally unsecured, and much more risky lending,” said Samit Ghosh, managing director (MD) and chief executive officer (CEO) of Ujjivan Small Finance Bank.