High-octane growth in SFB assets raise asset quality concerns: RBI

The rapid growth in the balance sheets of small finance banks (SFBs) has raised concerns about asset quality, especially in standard restructured loans. The concentration of business in limited geographies and customer profiles are behind such development, according to the Financial Stability Report (FSR).

SFBs’ restructured standard advances remain higher than pre-pandemic levels, though below the peak of September 2021, RBI said. The share of restructured advances was about 3.5 per cent of total advances as of March 2022.

SFBs aggregate deposits and credit rose by 32.7 per cent and 23.1 per cent, respectively, during the four quarters of 2021-22. The growth on advances has been 20 per cent and above in the last three financial years (FY20 through FY22).

The high balance sheet growth of SFBs comes on a low base. The universe of SFBs forms one per cent of total assets of the Scheduled commercial banks (SCBs), FSR said.

Karthik Srinivasan, Group head–financial sector rating, Icra, said at a broader level the restructuring level is high, something needs to be watched for. Half of them have restructured loans higher than sectoral figures (3.5 per cent), 4-5 have less than two per cent. Things are not alarming and are manageable.

About 15-20 per cent of the recast pool has already become non-performing. These advances should start turning around from this financial year (FY23), he added.

The gross non-performing assets (NPAs) of SFBs stood at 5 per cent at end of March 2022, down from over 6 per cent in September 2021. Their net NPAs also declined from close to 3.0 per cent in September 2021 to 2.2 per cent in March 2022, FSR said.

Their Capital Adequacy Ratio was comfortable at 19.3 per cent in March 2022, which is higher than the larger group of SCBs, though their Provision Coverage Ratio (PCR) at 53.9 per cent stood significantly lesser than other banking groups in the SCBs cohort.

SFBs provide a savings vehicle for underserved sections of the population and also meet the credit needs of small borrowers. They are expected to deploy 75 per cent of their Adjusted Net Bank Credit (ANBC) in priority sectors, with at least 50 per cent below Rs 25 lakh.