Deposits of small finance banks rise over last year

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Deposits of many small finance banks (SFBs) have risen compared to the previous year as customers increased savings in the banks, which provide services to underserved sections of society.

Data released by the Indian Banks Association (IBA) showed that deposits of major SFBs have increased in 2022 compared to a fall or minimal rise last year.

Deposits of AU Small Finance Bank rose to Rs 52,585 crore in 2022 from Rs 35,979 crore in 2021 and Rs 26,164 crore in 2020.

Deposits of ESAF Small Finance Bank rose to Rs 12,815 crore in 2022 from Rs 8,999 crore in 2021 and Rs 7,028 crore in 2020. Ujjivan Small Finance Bank’s deposits rose to Rs 18,292 crore in 2022 from Rs 13,136 crore in 2021 and Rs 10,780 crore in 2020. Utkarsh Small Finance Bank’s deposits rose to Rs 10,074 crore in 2022 from Rs 7,508 crore in 2021 and Rs 5,235 crore in 2020.

Experts said branch expansion and higher interest rates paid by SFBs on deposits have been the key factors among driving customers to deposit more money in them.

“We have built a deposit base of more than Rs.58,000 crore in the last five-and-a-half years with steadily improving granularity. It has been made possible due to our approach of building a predictable, scalable and replicable deposit franchise,” said Uttam Tibrewal, Executive Director, AU Small Finance Bank.

Small finance banks are on a high-growth trajectory compared to commercial banks as they are working on a combination model wherein, they offer higher interest rates alongside diversifying services, said Krishnan Sitharaman, senior director at CRISIL Ratings.

More branches, more deposits

A report based on the Reserve Bank of India (RBI) data noted that SFBs expanded their branches exponentially between 2016 and 2021.

“Over the five years from 2016 to 2021, SFB branches increased from 415 to 5,107 branches which amounted to a compound annual growth rate (CAGR) of 87.30 percent,” the report noted.

The authors of the report also compared the area-wise expansion of SFBs which showed emerging interest in them among people in semi-urban and rural areas compared to urban areas.

“In the year 2016-17, the proportion of SFB branches in metropolitan and urban areas together was 48 percent, which was reduced to 44 percent in 2020-21. Likewise, the proportion of SFB branches in semi-urban and rural areas increased from 52 percent to 56 percent over the same period,” the report said.

Archana Fulwari, assistant professor in the business economics department at Maharaja Sayajirao University and one of the authors of the report, explained the branch expansion by SFBs.

“One factor to look into rising branch expansion is that SFBs are a relatively new concept as they were set up only from 2015-16 onwards. So, branch expansion is a natural course of action,” she said.

“Another reason is that the incumbents in the sector are performing well in terms of return on assets. This is bound to attract more players and further increase the number of branches,” Fulwari said.

Sitharaman added that small finance banks are offering their customers a flexible banking experience with higher demand; so geographically, they can scale up quickly.

“With the new provisions and credit course to work on cleaning their books from the peak COVID period when they incurred bad loans, SFBs are able to open new branches,” he said.

Competitive products and deposit rates

Tibrewal said that raising low-cost but stable retail deposits and innovative product solutions like monthly interest payout, no deposit slips and Quick Response code solutions had been received well in the market.

“The core focus is on maintaining a stable CASA ratio while building a comprehensive suite of products, services & digital solutions with high customer engagement,” he added.

CASA is short for current accounts and savings accounts.

To attract retail depositors, many SFBs raised interest rates on fixed deposits (FD). Ujjivan Small Finance Bank offered an 8 percent interest rate on its 560-day deposits for regular customers and 8.75 percent for senior citizens. Jana Small Finance bank in its various schemes offered up to 8.5 percent interest on FDs to senior citizens and 7.75-8.35 percent to regular depositors.

“The hike in rates is in line with the bank’s retail strategy of building granular deposits and the evolving macro-economic situation,” Ittira Davis, Managing Director and Chief Executive Officer, Ujjivan SFB, said in a statement.

“Competitive and customer-friendly interest rates on savings accounts and deposits have always helped us get customer attention,” Tibrewal said.

Sitharaman explained how SFBs offer some of the highest interest rates.

“Majorly, these banks lend loans to micro, small and medium enterprises (MSME), housing, and medical sector borrowers and charge them higher interest rates as they have the borrowing power. These high lending interest rates on loans are balanced with high-interest rates on deposits,” he said.

The scenario during and post-COVID was of great volatility and low economic activity, Fulwari said.

“This saw a lot of funds in the stock market and in mutual funds failing miserably. Whereas on the other side, SFBs attracted retail depositors in these uncertainties by offering higher interest rates compared to other banks,” Fulwari explained.

Besides interest rates on FDs, many SFBs also offer attractive interest rates on savings accounts. AU Small Finance Bank provides savings account interest rates of up to 7 percent. Equitas Small Finance Bank and Ujjivan Small Finance Bank offer interest rates of between 3.5 percent and 7 percent.

“Looking at the bigger picture, it would be unlikely that SFBs could become major influencers in the banking sector because, in terms of percentage, they are minuscule compared to major market-holding commercial banks,” Fulwari said.