Mumbai Maharashtra India

Small finance banks (SFBs) will continue to see increased traction in deposits on the back of higher interest rates (1 to 2 per cent higher than most banks), focussed marketing strategies and maturing branches of a fast-growing branch network (40 per cent growth in branches in FY19), according to India Ratings and Research (Ind-Ra).

SFBs will need to mobilise around Rs 60,000 crore in deposits over FY20 and FY21 to support an annual growth asset of 30 per cent and to maintain borrowings at 25 per cent of the liabilities. The total deposits of SFBs jumped 130 per cent year-on-year in FY19, leading to an increase in the share of deposits to 59.6 per cent of non-equity liabilities in FY19 (37.6 per cent in FY18). SFBs incrementally mobilised deposits of Rs 28,850 crore in FY19.

In Ind-Ra’s report titled ‘Liability Strategy to Differentiate SFBs from Other MFIs During Transition,’ the agency had said that SFBs will need to ramp up deposits quickly to replace grandfathered loans and gradually build granular deposits. This scenario has been playing out since then.

The early depositors were credit societies, cooperative and grameen banks, non-banking finance companies (NBFCs) flush with equity, other small finance banks and mid-sized corporates.

Ind-Ra expects the share of granular deposits (current and savings accounts deposits (CASA) and retail term deposits), which accounted for 48 per cent of the total deposits in FY19 (42.5 per cent in FY18) will continue to increase over the medium term, aided by an increase in branches and banking points (to about 3,500 at end-FY19) and increase in deposit rates.

Although CASA (low-cost deposits) increased 76 per cent year-on-year to Rs 9,760 crore in FY19, the ratio has seen a decline to 19.2 per cent (25 per cent) as traction in term deposits increased and savings deposits were converted to term deposits owing to the high rates offered by SFBs.

The building of a CASA franchise depends on factors such as developing long-term customer relationships, ensuring ease of transactions, fostering trust in the brand and having a large branch network.

Large commercial banks benefit from vintage, resulting in deposits from large corporates, government departments (all state and local bodies), trusts schools and hospitals, businessmen and customers whose incomes have grown with the banks over many decades.

As a result, gathering CASA — especially CA — is a challenge for SFBs.