Small Finance Banks (SFBs) have been a hot topic for the past few years. While big banks have seen drops in their share prices, SFBs have shown impressive growth. But in the last few months, shares of Small Finance Banks have taken a big hit, raising concerns among investors.
In this article, we’ll explore why these banks are facing such a huge decline, the reasons behind it, and what the future might hold for them.
What are Small Finance Banks (SFBs)?
Small Finance Banks are a group of banks set up by the Reserve Bank of India (RBI) to provide financial services to rural areas, small businesses, and farmers. These banks mainly operate in places where big banks don’t reach. Their goal is to reduce reliance on private moneylenders and provide cheap and safe loans to people.
Reasons for the Crisis in Small Finance Banks:
Rising Loan Defaults: The biggest crisis for SFBs is the rising loan defaults, meaning delays and defaults in loan repayments. When loans default, banks have to keep more provisions, which reduces their profits.
More provisions mean less profit, sometimes even losses for the banks.
Increase in Non-Performing Assets (NPA): NPAs are loans where the repayments have not been made for more than 90 days. The NPA level in SFBs has risen significantly, reaching around 4-6%, which is alarming. High NPAs make it very difficult for banks to collect these loans, creating financial problems.
Problem of Multiple Loans: Many people in rural areas take loans from more than one bank, but SFBs haven’t tracked this properly. This has increased the number of loan defaults. People can’t repay multiple loans, increasing risk for the banks.
Inflation and Unemployment: Inflation also affects SFBs’ situation. Rising inflation causes economic difficulties, especially in rural areas. Additionally, fewer job opportunities in rural areas impact people’s income, making it hard for them to repay loans.
RBI Regulations: SFBs have to follow certain rules set by RBI. One of them is that 75% of their loan book must be for agriculture, small businesses, and affordable housing. This limitation makes it hard for banks to lend, resulting in higher NPAs.
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Opportunities and Solutions for Small Finance Banks:
- Better Risk Management: SFBs need to improve their loan disbursal methods. They should avoid high-risk unsecured loans and focus on secured loans like housing and commercial vehicle loans, which are safer investments.
- Improve CASA Ratio: The CASA (Current Account Saving Account) ratio of SFBs is currently very low, around 25%. Increasing this ratio is essential because CASA accounts have lower interest rates, giving banks more money at a lower cost.
- Better Use of Technology: SFBs should enhance their tech capabilities. There is stiff competition from Fintech companies offering digital loans. SFBs should partner with these companies to distribute more loans.
- Learn from AU Small Finance Bank: AU Small Finance Bank stands out because 90% of its loans are secured. Its Gross NPA is lower than other banks, making it a safer bank. SFBs should learn from AU’s model and improve their risk management policies.
Also Read: How Your Credit Score Affect Your Personal Loan?
Top 5 Small Finance Banks in India
Here are some prime Small Finance Banks in India along with their stock market information:
- Market Cap: ₹ 39,777 crore
- Current Price: ₹535.45 (as of Feb 2025)
- 52 Week High-Low: ₹530.75 – ₹755.40
- PE Ratio : 19.82
Equitas Small Finance Bank Ltd.
- Market Cap: ₹ 7,130 crore
- Current Price: ₹62.58 (as of Feb 2025)
- 52 Week High-Low: ₹61.35 – ₹109.75
- PE Ratio : 23.05
Ujjivan Small Finance Bank Ltd.
- Market Cap: 6,484 crore
- Current Price: ₹33.20 (as of May 2024)
- 52 Week High-Low: ₹30.88 – ₹57.30
- PE Ratio : 6.60
Utkarsh Small Finance Bank Ltd.
- Market Cap: ₹3,098 crore
- Current Price: ₹28.12 (as of Feb 2025)
- 52 Week High-Low: ₹27.43 – ₹61.70
- PE Ratio : 6.70
- Market Cap: ₹4,223 crore
- Current Price: ₹402.00 (as of Feb 2025)
- 52 Week High-Low: ₹363.80 – ₹760.90
- PE Ratio : 6.04
These banks are known for their strong presence in rural and semi-urban areas, providing essential banking services to underserved segments. Investing in these banks can offer both financial gains and social impact.
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Conclusion:
The future of Small Finance Banks can be bright if they focus on better risk management and move towards safer loan distribution. Controlling the NPA rate and improving the CASA ratio can strengthen their position in the coming times.