Small Finance Banks (SFBs) will shift the focus of the microlending business away from the dedicated micro finance institutions (MFIs), domestic rating agency India Ratings said today.
"The microfinance business will now be dominated by small finance banks (SFB) which will bring down systematic risk but at the cost of lower returns," it said in a note issued a week after the RBI granted in-principle nod to ten entities for setting up SFBs.
It is estimated that the ten entities will raise up to Rs 20 billion in equity till FY18.
The select entities include eight already operating as MFIs, a local area bank and one commercial vehicle financier. SKS Microfinance, one of the biggest microlenders, has not been granted approval by RBI despite applying.
India Ratings said among them, the eight MFIs and Bandhan, which got final approval from RBI in June to launch commercial banking operations, account for 54 per cent of the gross loan portfolio of NBFC-MFIs.
"More than 50 per cent of the micro finance landscape could be out of the mandatory purview of the micro finance credit bureaus," it said.
The SFBs will target the same segment as the balance NBFC-MFIs in most states, it said, advocating the need for Bandhan and SFBs to continue sharing on borrowers with the credit bureaus.
On the savings side, SFBs may allow higher deposit rates to push up the share of the low-cost current and saving account (CASA) deposit base, it said, adding that a CASA share of 20 per cent and an equal share of deposits in overall liabilities shall reduce the cost of funds by 1 per cent.
It stressed that the SFBs will have to replace bank borrowing, which stood at up to 90 per cent of the overall borrowing, through deposits, capital markets and refinance entities such as Micro Units Development Refinance Agency, Small Industries Development Bank of India and National Housing Bank.
Citing its earlier estimate of a 24 per cent yearly growth in microcredit between FY15 to FY19, it said the ten SFBs will have to raise up to Rs 20 billion of equity by FY18, tier-II capital of up to Rs 15 billion and replace bank loans of Rs 200 billion.
Most of the SFBs will operate under the holding company structure and the SFB could be a subsidiary of the SFB license holder with RBI approval, it said.
