BUSINESS

No threat to biggies yet but SFBs gathering steam

Although the consensus opinion in the industry is that small finance banks do not pose a threat to either conventional banks or non-banking financial companies (NBFC), the sector has nevertheless been seeing remarkable growth in credit disbursement as well as deposits, albeit on a low base.

Data from the Reserve Bank of India (RBI) show that the small finance banks, in total, saw their deposits grow 31.6% in the third quarter (ended December) of this financial year, compared with the second quarter.

On a year-on-year basis, this growth was 193.4%. The previous quarters saw even faster growth, with Q2 at 306%, Q1 at 331%, and the fourth quarter of the previous year at 387.5% on a year-on-year basis.

This phenomenal growth, however, has come on a very small base and that’s perhaps why the bigger banks and NBFCs don’t see small finance banks as a competition just yet.

In context, the Rs. 30,000 crore of deposits (as of December end) in small finance banks makes up just 0.2% of the deposits in all scheduled commercial banks.

Similarly, the Rs. 51,673 crore of loans, given by these banks, makes up just 0.6% of the total lending undertaken by the scheduled commercial banks. “If you look at the genesis of small finance banks, they have all emerged from being a non-deposit NBFC or micro-lenders,” said Gaurav Anand, co-founder, Namaste Credit, a marketplace for loans.

“They were catering to a segment of the market that was not catered to by regular banks. I don’t think it’s a direct competition, but is complementary.”

The belief is that the overall market for credit is so big that there is no scope for competition yet. Rather, as the market itself grows, the scope for more players to grow also increases.

“Our belief is that the small finance banks are probably not eating into the market share of the NBFCs either,” Lucas Bianchi, another co-founder of Namaste Credit, added.

Growing market

“What’s largely happening is that the market is growing and there’s space for growth for everybody. There are many different segments and not all those segments have been catered to.”

This sentiment is echoed by the NBFC players as well, who say that the lack of penetration in the market has meant that there is no phenomenon where small finance banks are eating into the market share of NBFCs.

“Because the market is very large and very under-penetrated, we are not likely to see any pressure from any player in terms of competition in the market,” said Sanjay Sharma, managing director, Aye Finance.

“Has the competition changed from three years back to today? I can’t say there has been a significant change there either.

“Small finance banks will eventually target the same segments as us, but today they are still trying to come to terms with the setting up the liabilities side of their business, which is the deposits,” Mr. Sharma added.

More time to settle

Sanjay Kao, chief business officer, Ujjivan Small Finance Bank, also explained that the industry was still in its infancy, where several players were trying out different models. The overall model followed by the industry would settle only in a couple of years, he said.

“There are two arms to a small finance bank, like in any other bank,” Mr. Kao explained. “One is the asset arm, and the other is the liability arm. If you look at all the small finance banks, all of them have been micro-finance institutions (MFI) in the past, so the asset business and asset base, which is the lending side of things, has always been there.

What has happened is that a few more loan verticals have been added.

“On the deposit side, it’s new for all of us, so it must grow,” Mr. Kao added. “It should grow at 120-170%, if not more, depending on the base that each bank operates on. The slowdown in Q3 is, in my mind, due to an increase in the base. If you look at the absolute numbers, I don’t think there has been a slowdown, certainly not in the case of Ujjivan.”

The lending side of small finance banks has also seen strong growth. The RBI data shows that the total lending by small finance banks grew 88% in the third quarter of this financial year, 235% in Q2, 410% in Q1, and 449% in the fourth quarter of the previous financial year.

This, however, is explained by the fact that lending by the public sector banks has been subdued, according to a former Governor of the RBI.

The numbers back this assertion. RBI data shows that credit growth for the public sector banks was 8.4% in Q3, 8.7% in Q2, and 5.9% in Q1.

“If the public sector banks are not lending, then the people have to go somewhere for their loans,” the former Governor said on the condition of anonymity. “The growth in credit for the small finance banks can be answered by this. People are looking for credit and have nowhere else to go.”