 "Small finance banks require up to Rs 60k crore of non-equity funds by FY20: IndRa")
Small finance banks funding mix will be different and complex after their transition from non-banking finance companies and microfinance institutions (NBFC-MFIs) and they are likely to need Rs 60,000 crore of non-equity funding by the financial year 2019-2020, according to a report.
The current funding mix for MFIs includes bank debt, other borrowings and equity, with bank debt being the largest proportion in the mix.
Scheduled Commercial Banks (SCBs) prefer funding MFIs because these advances qualify as priority sector lending (PSL) for them. SCBs are also significant buyers in the securitisation market (mostly for PSL qualifying loans) besides business correspondent channels.
“The improved profile and acceptability of the sector and the fact that some of the MFIs will transform into banks increase the funding complexity mainly because SFBs may not be able to directly borrow from banks,” the rating agency India Ratings and Research said in a report on Wednesday.
It said although at the beginning of the transition (one to three years), SFBs are likely to be comfortable on the short-term liquidity front, they will need to replace their amortising bank loans and fund the incremental book growth by customer deposits (1-1.5 years and that too primarily wholesale deposits) and certificate of deposits (CDs).
“This could shorten their liability tenures significantly while their asset tenures could increase as they venture into longer term individual and secured loan products,” the report said.
The rating agency said SFBs could require up to Rs 60,000 crore of non-equity funding by the financial year 2019-2020, assuming 25 per cent steady state loan growth and 25 per cent off-balance sheet loans (at loans under management (LUM) of about Rs 0.85 lakh crore).
It said instead of using bank loans, SFBs would resort to deposits, eligible borrowings, debt capital markets that could constitute over 60 per cent of their balance sheets (about Rs 60,000 crore) over the medium term.
The composition of liabilities and liquidity strength will primarily depend on the ramp-up of granular deposits.
The appetite of mutual funds for SFBs' certificates of deposits (CDs) could be limited without a further improvement in their credit profiles. The rating agency said the demonetisation and subsequent measures could mean that landed cost of deposits for SFBs from the existing borrowers could be lower than expected earlier and the opening of savings accounts could gain traction.
“SFBs may initially ramp-up their deposits through wholesale funding at rates higher than those of SCBs and gradually replace them with granular retail deposits preferably from non-microfinance customers,” the report said.
At a steady state, SFBs could mobilise deposits at about 60 per cent of their balance sheet.
If the entire Rs 60,000 crore non-equity funds were in the form of deposits, then it would have constituted 10 per cent of the incremental bank deposits from non-metro catchments in the financial year 2015-2016.
The report said till the time the credit profile of SFBs improve substantially, funding from capital market especially domestic mutual funds would be limited and yield seeking.
The document expects SFBs with strong operating and capital buffers, respectable boards, high standards of corporate governance and steady operating strategies to access capital markets with relative ease.
