NPA ceiling to be stumbling block to qualify
CL Jose
KOCHI: Many leading small finance banks (SFBs), including the lone member from Kerala – Esaf SFB, may ‘miss the bus’ this time on account of higher non-performing assets (NPA) or bad loan ratio.
The RBI has come out with a circular yesterday (April 26) offering an opportunity to SFBs to convert themselves into regular banks or universal banks on meeting certain criteria with regard to ceiling on NPAs, minimum net worth, profitability, etc being the key ones.
There are about a dozen SFBs, including ESAF Small Finance Bank (SFB), Au Small SFB, Equitas SFB and Ujjivan Small SFB – all established following the issue of SFB guidelines by RBI issued in 2014, ESAF being the only from Kerala.
Though many of the SFBs stand to qualify most conditions set out by the regulator, the ceiling on NPAs could pose a stumbling block to the ‘Universal bank’ ambition of some leading SFBs including ESAF.
Criteria
The set of guidelines issued on April 26 has stated that an SFB aiming to become a universal bank should have a minimum net worth of Rs1,000 crore as at the end of the previous quarter (audited) and the shares of the bank should have been listed on a recognised stock exchange.
These SFBs should have earned a net profit in the preceding two financial years and more importantly, their gross NPA (GNPA) and net (NNPA) should stay below or equal to 3 per cent and 1 per cent, respectively, in the last two financial years.
NPA may pose roadblock
But the NPA ceiling is likely to throw a spanner in the works for a few leading small finance banks.
As of March 31, 2024, ESAF SFB’s gross non-performing assets (GNPA) were Rs998 crore, which is a 183.52 per cent increase year-on-year (YoY) from Rs352 crore in March 2023.
The GNPA ratio has surged to 5.29 per cent from 4.16 per cent in the previous quarter, defeating the 3 per cent ceiling by far.
Coming to the net non-performing assets (NNPA), the ratio at end-FY24) stays at 2.65, again well above the one per cent ceiling prescribed by RBI for becoming a Universal bank.
Other SFBs that fail to qualify on the NPA front also include Equitas, Sarvodaya, Utkarsh small finance banks, etc.
Interestingly, most SFBs qualify the other parameters set by RBI, like minimum net worth of Rs1000 crore, two years profitability, listing on a stock market, etc.
Universal banks are privileged
SFBs acknowledge that the privileges enjoyed by universal banks in the financial services space are really covetable, the most important being the minimum capital requirement of 9 to 12 per cent against the higher 15 per cent requirement prescribed for SFBs.
There are restrictions for the purchase of portfolios of loans classified as standard assets, for SFBs. They are permitted to purchase only from banks and NBFCs for the specific purpose of meeting the sub-targets within the 40 per cent priority sector lending (PSL) target as applicable to commercial banks.
SFBs are not permitted to invest in credit derivative or issue credit derivatives, either. SFBs are not allowed to take out loans of other banks.
Moreover, SFBs are required to have 25 per cent of their branches in unbanked rural centres within one year from the date of commencement of operations.
