SFBs need Rs 4,000 cr capital to maintain 30% CAGR in advances: CareEdge

Capital raising delayed amid volatile markets, lower risk apetite among investors

Small Finance Banks ( SFBs) as a group will need to raise capital to the extent of Rs 4,000 crore in FY23 and FY24 in order to maintain 30 per cent Compound Annual Growth Rate for advances. This factors in a two per cent cushion over minimum regulatory capital requirements, according to rating agency CareEdge Ratings.

With the continuing asset quality challenges faced by the SFBs, they now also face issues in mobilising fresh capital. Many of them have planned Initial Public Offering (IPO) but there has been delay in raising funds.

Post demonetisation, the capital cushion improved with fresh equity mobilisation by few SFBs. However, this was depleted partly due to the spike in credit cost during the Covid-19 pandemic. Moreover, the incremental capital raise also represents a declining trend, while the advances continue to grow at a higher rate, rating agency.

Five SFBs in the market planned to raise a total of Rs 5,600 crore via the IPO route. Of this, some Rs 3,000 crore consisted of a fresh issue of shares. Most of the SFBs had filed the papers for the offering with Sebi six months to a year ago.

However, they have been unable to raise equity within the expected timeline. Further, the volatility in the capital markets and the reduction in investors' risk appetite for equities have made fund raise difficult.

The advances of SFBs grew at a four-year CAGR of about 40 per cent till FY22-end, as against 18 per cent CAGR for private banks.

Though the regulations allow SFBs to have a higher proportion of Tier-II capital than Universal banks due to limited demand for Tier-II issuances, SFBs' capitalisation is skewed towards Tier-I. CareEdge Ratings expects this situation to continue going forward.

The rules allow SFBs to raise Tier-II capital to the extent of 100 per cent of Tier-I capital. However, the proportion of Tier II capital is significantly lower for the industry at present. The Tier-I CAR stood at 18.7 per cent for the industry as on March 31, 2022, whereas Tier-II CAR stood at 1.9 per cent only.

There is huge scope for the industry to raise Tier-II Capital. However, there is limited demand for Tier-II Capital from investors, the rating agency said.