RBI closely monitoring capital position of small finance banks, few may be forced to shore up buffer

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Small finance banks that have seen an erosion in their overall capital position since FY24 are under the regulatory lens of the Reserve Bank of India,  according to highly-placed sources aware of the matter, with a few of the lenders may be compelled to shore up their ability to absorb losses and meet capital requirement in the coming quarters.

“It is anticipated that at least 3–4 small finance banks may be forced to shore up their capital position in the coming quarters, given how capital has been consumed from the start of FY25 due to weak asset quality,” one source told Moneycontrol on condition of anonymity.

Email sent to RBI seeking comments on the matter remained unanswered till publishing the article.

Declining Capital Buffer

Small finance banks have seen an erosion of 60–290 basis points in their overall capital position (CRAR or capital to risk weight assets ratio) between FY24 and Q3FY25. If one were to consider only the common equity tier-1 (CET-1) capital, this erosion is around 90–320 bps for the same period. The Capital to Risk-weighted Assets Ratio (CRAR) is a ratio to measure a lender's ability to absorb losses and meet capital requirement.

Banks that have seen most erosion to CRAR since FY24 include AU Small Finance Bank, Jana Small Finance Bank, Capital Small Finance Bank, Suryoday Small Finance Bank and Utkarsh Small Finance Bank, while Equitas SFB, Utkarsh SFB, AU SFB and Jana SFB have seen the most erosion of CET-1 ratio.

SFBs are required to maintain 15 percent CRAR and 7.5 percent Tier-1 capital, including addition Tier-1 of 1.5 percent, as per regulation.

Recently, the board of Uttar Pradesh-based Utkarsh SFB had approved plans to raise Rs 750 crore as fresh equity capital. Utkarsh’s common equity tier-1 capital stood at 17.94 percent as on December 31, 2024 as against 21.49 percent a year ago.

What RBI Told SFB Chiefs 

At a recent meeting with all SFB chiefs, banking regulator is said to have taken stock of their business and capital raising plans. On the business side, it is learnt that that RBI officials questioned banks about new product and business lines that they were planning to enter in the next three years. “Most of the SFBs have stuck to doing the same business which was their core, even prior to their SFB avatar. Those who are focused on vehicles are pretty much doing the same thing, and those who were very good with microfinance are continuing with the business,” said a senior bank executive who was part of the discussions with the regulator. “This is not well-taken by the regulator, because there is barely any innovation on the business side,” he added.

Another CEO of a small finance bank said the apprehension of the regulator is that there may not be a very compelling reason for investors to put money into SFBs, if the need arises in the near term.

“Last round of funding which SFBs enjoyed was either on the back of having obtained a SFB license, or due to listing,” the CEO explained. “This time around, the regulator is of the view that many of us do not have a good enough business model to attract capital”.

What is equally of concern to the regulator is that most of the private equity firms who have invested in SFBs are near the end of the term of the fund through which the investment has been made. In some cases, the term of the fund has ended, prompting questions over follow-on funding. “Will the existing PE investors be willing to put more funds into the banks if the need arises,” questioned another senior executive of a small finance bank.