Small Finance Banks, or SFBs, which are a type of niche bank in India, as a group, are required to secure capital to the sum of INR 4000 Crore in the Fiscal year 2023 (FY23) and Fiscal year 2024 (FY24), to keep a 30% Compound Annual Growth Rate (CAGR) for lending. CareEdge Ratings, one of the leading credit rating firms, includes a 2% buffer over the minimum capital requirement.
The Small Finance Banks (SFBs) currently need help mobilizing new money due to the ongoing asset quality concerns they are experiencing. Although several of them had intended Initial Public Offerings (IPOs), the process of securing capital was delayed.
Following the 2016 Indian banknote demonetization, the capital cushion was enhanced due to some Small Finance Banks (SFBs) raising new shares. Nevertheless, the rise in borrowing costs at the time of the coronavirus outbreak contributed to this being exhausted. Furthermore, the incremental capital raising rating agency also exhibits a diminishing tendency, but the advances keep expanding faster.
A sum of INR 5,600 Crore was raised through an Initial Public Offering (IPO) by 5 Small Finance Banks (SFBs) in the market. A new offer of shares made up almost INR 3,000 Crore of this. Most SFBs had submitted the necessary paperwork to the Securities and Exchange Board of India (SEBI) 6 months to one year before the offering.
Nevertheless, they have yet to be able to obtain equity in the anticipated time frame. Additionally, it has been challenging to obtain money due to the capital markets’ fluctuations and investors’ declining risk tolerance for shares. Until the end of the Fiscal year 2022 (FY22), Small Finance Bank (SFB) advances expanded at a 4-year Compound Annual Growth Rate (CAGR) of roughly 40% compared to private banks’ CAGR of 18%.
Although because of the low demand for Tier 2 issuances, laws permit Small Finance Banks (SFBs) to hold a higher percentage of Tier 2 capital than Universal banks, SFBs’ capitalization is tilted towards Tier 1. CareEdge Ratings anticipates that the current state of affairs will persist. The industry has enormous potential for raising Tier 2 Capital, although investors’ demand for it is pretty modest.