 "RBI")
The Reserve Bank of India (RBI) observed a higher reliance of small finance banks on deposits from the cooperative banks, which comes at a higher rate, suggesting a high degree of interconnectedness which could lead to contagion risks.
“Many SFBs have low current account and savings account (Casa) deposits and a greater reliance on bulk term deposits, often acquired at higher rates, especially from cooperative banks,” RBI said in the Trend report.
“This suggests a high degree of interconnectedness of SFBs with cooperative banks, with the possibility of any shock to the latter sector spilling over to the former,” it said.
Moreover, the regulator cautioned those SFBs that were converted from microfinance institutions as they continue to have a higher share of microloans, which are unsecured in nature.
“Some entities, which were NBFC-MFIs earlier and subsequently converted to SFBs, retained their earlier business models. Consequently, the share of unsecured lending in their portfolios, especially to microfinance and joint liability group (JLG) borrowers, is high,” the report said.
This lack of asset diversification is also often coupled with geographical concentration, implying significant concentration risk, RBI said.
The consolidated balance sheet of SFBs grew at a pace faster than that of scheduled commercial banks (SCBs) during 2022-23, notwithstanding some moderation during the year. With deposit growth slowing down during the year, SFBs resorted to higher borrowings to fuel credit growth.
