Capital raising by Small Finance Banks picks up pace in the Q2: Report

Despite the sector’s growth returning and the postponement of IPOs in FY22 and Q1 of FY23, the majority of SFBs are absorbing credit costs.


According to a report by Care Edge Ratings, small financing banks’ (SFBs) capital raising has accelerated in the quarter that concluded in September 2022.

According to the brokerage report, despite postponing initial public offerings (IPOs) in FY22 and Q1 of FY23, the majority of SFBs are absorbing credit costs and growth that is returning to the sector. This is largely because of the unfavourable equity market environment and SFBs’ moderate performance in FY22.

“Capital mobilization has gained momentum. In the quarter ended September 2022, SFBs raised equity and Tier II Capital aggregating to Rs. 3,275 crores as against Nil in Q1FY23. Many more SFBs also reviving their capital raising plans including IPOs. To achieve a growth rate of 30% CAGR during FY23-FY24, most of the SFBs need to mobilize capital. Considering 2% cushion over regulatory capital requirement and 30% CAGR growth, SFBs would require to raise fresh capital of Rs. 4,000 crores during FY23-24,” the report said.

As of March 31, 2022, SFBs had a market share of 0.71% for deposits and 1.14% for advances in the banking industry. According to the brokerage report, the SFBs have increased their market share thanks to effective deposit mobilisation and outreach to the underbanked.

“With a strong focus on liabilities franchise, SFBs have significantly improved their credit deposit ratio and achieved significant loan book diversity in addition to robust advances growth. In the medium to long term, it is anticipated that the share of non-microfinance portfolio will rise significantly, according to the report.

In comparison to the private sector banks, which grew at a CAGR of 18% over the past four years, the advances book has increased at a rate of almost 40%. In FY22, overall advances increased by 24% year over year, while deposits increased by 32% year over year.

CareEdge Ratings predicts that despite some SFBs having cash difficulties, the industry will continue to grow at a rate of 24% in FY23. “Growth rate for the industry is likely to exceed FY22 levels in case capitalization improves. Capital raising by SFBs gained momentum in Q2FY23 and is expected to continue,” the report said.