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 today.
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 trillion).
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.
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