The total managed loan assets (on-book, off -book and including their major subsidiaries if any) of the 10 SFBs was INR201bn and balance sheet size was around INR222bn in FY15. MFIs that have received approval as a universal bank and SFBs, stood at 54% of NBFC-MFI gross loan portfolio in FY15. Under the banking format they can provide multiple financial products including savings to the underserved individuals and MSMEs. Reserve ratios and deposit insurance will reduce systemic risk, and over time lower deposit cost could be transmitted to lower lending rates.
SFBs will be subject to all prudential norms and regulations of the Reserve bank of India as applicable to scheduled commercial banks, except for the capital requirements (more stringent in case of SFBs) and the lending/business restrictions (priority sector lending requirement of 75% of credit compared with 40% for banks and 50% of the loan portfolio with ticket sizes less than INR2.5m).
SFBs would need to lend to the underbanked, which means higher investment into systems/processes and lending to individuals rather than groups, which will push up credit risk and cost, thus return on assets may decline to 1%-2% from 2%-3% in FY15. Ind-Ra believes it would be prudent for SFBs to continue sharing borrower data with MFI credit bureaus which will help them as well as NBFC-MFIs exercise caution in over-leveraging the micro-borrower.
The gross loan portfolio of the NBFC-MFI sector in FY15 stood at INR400.1bn, of which Bandhan Bank (MFI till March 2015), accounted for INR95bn while the eight MFIs account for INR119bn. More than 50% of the micro finance landscape could be out of the mandatory purview of the micro finance credit bureaus.
Ind-Ra believes these institutions will, at least for the next two to three years, target the same segment as the balance NBFC-MFIs in most states. Hence Bandhan Bank, and in future, SFBs should continue sharing data and limit borrowers from borrowing from more than two entities to avert over-leveraging the borrower.
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SFBs may offer higher interest rates on deposits compared to commercial banks to ramp up current account saving account (CASA) and term deposits and could be largely wholesale deposit funded in the initial three to four years. Our preliminary analysis shows that at 20% CASA and 20% deposits to liabilities, these entities could save about 1% on borrowing cost which could be the cost of raising deposits and deposit insurance. There could be material cost savings if deposits to liabilities ratio goes up to 30%-40% and 20% CASA.
SFBs will have to replace bank borrowing (60%-90% of total borrowing in FY15) through deposits, capital markets and refinance entities such as Micro Units Development Refinance Agency, Small Industries Development Bank of India and National Housing Bank). Ind-Ra estimates the microfinance sector to grow strongly at 24% annually over FY15-FY19. Thus the 10 players could be required to replace INR200bn of bank loans and at an aggregate net worth of INR47bn, they will need to raise equity of INR15bn-INR20bn and tier two capital of around INR10bn-INR15bn by FY18.
The domestic promoter entities shareholding is required to be at least 40% (26% if already diluted below 40%); in most of the entities the promoter holding is already below 26% and further. They have also issued compulsorily convertible preference shares with variable conversion terms which could further dilute their holding unless they infuse equity. Ind-Ra expects most potential SFBs to follow the holding company structure and the SFB could be a subsidiary of the SFB license holder (with RBI approval). Further, SFBs' NBFC subsidiaries could be merged with the SFB iteself.
Ind-Ra has an outstanding rating on Equitas Finance ('IND A-'/Stable) and Au Financiers (India) ('IND A+'/Stable).
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