Small finance banks' branches concentrated in urban, semi-urban areas; NPA ratio moderate: RBI paper

The branches of small finance banks (SFBs) are concentrated in urban and semi-urban areas and the limited spread in rural and smaller semi-urban centres leaves much to be desired, a RBI paper has said.

There has been a rapid growth in the branch network of SFBs since their inception, but the growth has been concentrated in southern, western and northern regions, which are relatively well-banked regions in the country. Their penetration in the north-eastern region, known as the least banked region, remains low.

"SFB branches also display concentration in the urban and semi-urban centres or more specifically Tier 1 to Tier 3 centres having population of 20,000 persons and above. Tier 5-6 (rural) centres with population of less than 10,000 persons accounted for only about 18 per cent of the SFB branches in March 2020," the paper, prepared by Richa Saraf and Pallavi Chavan from the Reserve Bank of India's Department of Supervision, said.

However, it said the views expressed in the paper are those of the authors and do not reflect the view of the central bank.

The RBI issued licensing guidelines for SFBs in 2014, following which 10 SFBs have commenced operations so far. The number of branches of SFBs rose to 4,307 by March 2020, while their share in total assets of financial sector stood at 0.4 per cent in March 2019.

Currently, there is considerable concentration of assets within the SFB group, with top-two SFBs accounting for 46 per cent of total assets of all SFBs in March 2020 and top-three SFBs accounting for 60 per cent share.

"However, the relatively big-sized SFBs have displayed lower growth of assets in more recent years. Hence, the concentration of assets within the SFB group may come down over time," it said.

The SFBs, the paper said, are catering to economic sectors like agriculture, small scale trade and professional services, which are relatively under-served by scheduled commercial banks.

"Moreover, even within the industrial and services sector credit, these banks have succeeded reasonably in reaching out to MSMEs (micro, small and medium enterprises). Apart from serving the under-served sectors, the loan portfolio of SFBs is also geared towards small-sized borrowers," it said. About 83 per cent of loan portfolio of SFBs had a credit limit of up to Rs 25 lakh in March 2020.

The paper pointed out that the non-performing asset (NPA) ratio of SCBs has remained moderate since their inception, underlining a healthy asset quality.  While this is on expected lines, as SFBs do not suffer from a legacy of NPAs as scheduled commercial banks (SCBs), the low NPA ratio also reflects better management of credit risk despite serving a small-sized clientele.

Despite the rise in deposit base of SFBs, their percentage of current and savings accounts remains lower than other SCBs. The share of CASA in total deposits for SFBs stood at 15 per cent in March 2020 as compared to 41 per cent for other SCBs.

"An increase in the CASA base can augur well towards lowering the cost of funds for these banks, going forward," the paper said.

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