SFBs will require Rs 5,000-6,000 crore equity infusion for 15-20% CAGR by 2023: ICRA

Small finance banks (SFBs) may need an equity infusion of close to Rs 5,000-6,000 crore for the industry to attain a compound annual growth rate (CAGR) of 15-20 percent 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 percent, the report said. "SFBs may require an equity infusion of around Rs 5,000-6,000 crore for industry to achieve a CAGR of 15-20 percent 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 percent.

Currently, eight out of 10 SFBs are yet to comply with the requirement of bringing down promoter shareholding to 40 percent 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 Rs 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 percent for FY21 as compared to a growth of 30 percent in FY20.

The total asset base of SFBs crossed Rs 1,30,000 crore as on March 31, 2020 and AUM crossed Rs 90,000 crore with a growth of 30 percent in FY20, helped by continued healthy traction on resource mobilisation. SFBs have made good progress on deposit mobilisation, with 70 percent 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 percent 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 percent 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.