Synopsis:
- The journey of Small Finance Banks (SFBs), which were envisaged as financial inclusion vehicles to provide credit to the non-banked and underbanked population of the country, has been marked by resilience amid numerous obstacles starting from events like demonetisation and its after-effects, GST implementation, NBFC crisis of 2018, private banks fiasco of 2020 affecting deposits and more recently the Covid-19 pandemic.
- Covid-19 hit SFBs hard during FY21 and FY22 due to the exposure to economically weaker borrower profiles causing higher delinquencies and an increase in credit costs impacting profitability. Most SFBs saw a reduction of their profitability with some even incurring losses and many SFBs were looking to raise growth capital during FY22.
- With the improvement in the economic landscape and financial performance of SFBs, there has been an increasing investor interest for the sector in the current year with few players raising equity through their maiden IPOs. During 9MFY24, SFBs raised equity capital aggregating ₹1,527 crore and around ₹1,725 crore is expected to be raised during Q4FY24.
- With the credit cost worries behind and access to capital, the SFBs are poised for a strong growth period. CareEdge Ratings expects SFB advances and deposits growth of 22-25% and report stable profitability with ROTA in the range of 2.1% to 2.4% for FY24.
- The sector has also recently witnessed announcements of a couple of mergers for inorganic growth. However, these are event specific and CareEdge Ratings do not envisage any major consolidation in the industry.
