The Reserve Bank of India (RBI) has expressed concerns over small finance banks (SFBs) due to their rising asset quality stress and high concentration risks. The central bank has told these banks to explore mergers in order to gain scale and minimise concentration risks, a report by ET stated, quoting three executives tracking the sector.
“Small finance banks are under the close supervision of the RBI. Amalgamation between banks is one of the options that have been thought of at the regulatory level to address the concerns,” said one of the persons. The banking regulator had a meeting with the management of these lenders a couple of months ago, the executive informed, while maintaining that gaps in corporate governance and succession planning at some of these SFBS were the other areas of concern for the supervisory stakeholders.
Small finance banks that have a higher share of micro loans are in the most challenging situation in the microfinance sector, which saw the average gross non-performing assets (NPA) going up to an 18-month high of 11.6 per cent at the end of September 2024. These lenders had 15.3 per cent of their cumulative microfinance portfolio as NPAs.
While the industry level data till end December is not available yet, the overall sectoral asset quality is likely to worsen, as shown by the quarterly earnings.
There can be two risks to small finance banks – First, many have high exposure to the microfinance sector, which has been reeling under stress. Second, a few such banks have large exposure to the geographic pockets of higher stress.
The executives stated that these issues could be addressed either by amalgamation of these banks, or merger with bigger entities with a strong capital back-up. “Merger between banks operating in different geographies may make sense and would address the concentration risk,” a senior microfinance practitioner told ET.
Earlier, the RBI had announced the setting up of a Standing External Advisory Committee (SEAC), which will evaluate applications for Universal Banks as well as Small Finance Banks (SFBs). In a release, RBI had said that the secretarial support to the committee would be provided by the Department of Regulation, Reserve Bank of India.