Small finance banks capital raising challenge beginning to ease

The challenge of raising capital faced by small finance banks (SFBs) seems to be beginning to ease. With a majority of SFBs already absorbing credit cost and growth coming back to the sector, capital mobilization has gained momentum, said credit rating agency CareEdge Ratings on Monday.

SFBs raised equity and Tier II capital aggregating to ₹3,275 crore during the second quarter ended September in the current fiscal as against nil in Q1 FY23. Many more SFBs also reviving their capital raising plans including IPOs, the rating agency said.

This momentum in capital raising is expected to continue but is likely to see 24 per cent year-on-year (YoY) growth in advances recorded in FY22 to be maintained in FY23 as well because some SFBs continue to face constraints on capital. The advances for SFBs grew from ₹1.08 lakh crore in FY21 to ₹1.35 lakh crore in FY22.

However, if 30 per cent CAGR growth in advances is to be considered for FY24 along with a 2 per cent cushion over the regulatory capital requirement, most of the SFBs will have to mobilise capital, CareEdge Ratings noted.

“The (SFB) industry needs to raise capital of around ₹4,000 crore (for 30 per cent growth). Though the regulations allow SFBs to have a higher proportion of Tier-II capital as compared to universal banks due to limited demand for Tier-II issuances, SFBs capitalisation is skewed towards Tier-I. CareEdge Ratings expects the same to continue going forward too,” the agency said. SFBs’ share in advances of the banking industry has increased from 0.4 per cent as of March 31, 2018, to 1.14 per cent as of March 31, 2022.