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Small finance banks serving priority sector profitably: RBI paper

The newly created small finance banks (SFB) are serving the intended marginalised and under-served people, and doing so profitably, an analysis by RBI officials has revealed. This category of banks was started in 2017, and a bulk of the entities are microfinance institutions, which converted themselves into lenders, which gave them access to public deposits.

“The SFBs have been provided license with the objective to serve the under-served and marginalised sections of the society…preliminary analysis reveals SFBs to be leading in serving the priority sector,” the paper by Nitin Kumar and Sarita Sharma said.

The study contains an initial assessment of the performance of SFBs for early policy inputs, it said, stressing that its assessment should not be considered as the view of the central bank.

A basic examination reveals a relatively high credit deposit ratio of SFBs and most of them displayed healthy profitability with further improvements in recent quarters, it said.

The study went into operational financials between March 2017 and March 2020 and indicated that bank-level factors like efficiency, leverage, liquidity and banking business are significant in determining SFBs’ profitability during this early period of operation.

It can be noted that the first quarter of the FY22 was a difficult time for many of the SFBs, as the collection efficiencies declined because of the second wave of the pandemic.

Meanwhile, another paper in the RBI bulletin for August on the targeted long term repo operations said that non-bank lenders, which accessed funds through the route, have displayed an improvement in their short-term liquidity buckets compared to others.

As NBFCs were finding their footing after the IL&FS default, the COVID-19 pandemic started a chain of adverse reactions, which exacerbated their liquidity position, the paper by KM Neelima, Nandini Jayakumar, and Jibin Jose said.

The RBI and government swung into action to address the stress through a slew of measures, including the TLTRO scheme that aimed at providing targeted liquidity to sectors and entities, which were experiencing liquidity constraints and restricted market access, it added.

Banks were provided funds at the repo rate and were directed to invest in investment-grade papers of corporates, including NBFCs, it said.

The policy was beneficial in alleviating the liquidity stress faced by the treatment NBFCs in the period following COVID-19 and helped them navigate the tough times, the paper said, adding that this happened at a time when both banks and credit markets were averse to help such entities.

“The empirical exercise undertaken in this article, therefore, suggests that the Reserve Bank’s intervention for easing financial conditions proved to be timely and effective for the NBFC sector,” it noted.

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