SFBs continue to diversify their portfolio beyond microfinance business

Eight of the 10 firms that were granted SFB license had been MFIs and for most of them microfinance is the central
product. The microfinance segment accounted for 38% (including Capital and AU SFB) of overall business of SFBs in
Fiscal 2020. From Fiscal 2016 to Fiscal 2019, SFBs shifted their focus from microfinance to other products. However,
due to regulatory norms, the core customer base is unlikely to change significantly. After the conversion of NBFC-MFIs
to SFBs, the focus is on diversifying the product portfolio. As a result, the share of their MFI portfolio in total advances
reduced to 69% as of March 2019 from 90-95% as of Fiscal 2016.

SEBs will have to focus on small-ticket size lending to financially under-served and unserved segments (loans below 22.5
million will have to form at least 50% of their loan book). MFIs that converted to SFBs to further diversify and focus on
allied segment loans, such as MSME loans, affordable housing finance, gold loans, CV/non-CV loans and two-wheeler
loans, is expected to reduce the dominance of microfinance in their overall loan portfolio.

SEB deposits to grow faster than private, public sector banks

SFBs have significant growth potential as most of them were functioning as NBFCs/ MFIs previously. On commencement
of their operations, all SFBs focussed on increasing their deposit base. The overall deposit base doubled to around % 557
billion as of Fiscal 2019. It further increased by approximately 48% to reach % 835 billion in Fiscal 2020. The increase
could be attributed to the higher interest rates. Before converting into SFB, most players did not have access to deposits
and their deposit as a percent of AUM was negligible at the time of conversion. This rose to 87%. However, proportion
of CASA deposits reduced marginally from 19.2% in Fiscal 2019 to 18.5% in Fiscal 2020, as customers sought higher
interest in term deposits.

On account of the recent crisis with Yes Bank, several private banks are finding it challenging to convince depositors to
maintain deposits. However, SFBs deposit growth is a sharp contrast to the shrinking deposit base of private banks. SFBs
have witnessed strong growth in deposits despite the lockdown and have seen addition in online customers driven by
higher interest rate they offer.

For instance, Jana SFB, Suryoday SFB and Equitas SFB offer 7.5%, 7.25% and 7.10%, respectively, for a one-year
deposit while established players such as SBI, HDFC and Kotak Mahindra Bank offer 5.5%, 5.25% and 5.15% on deposits
of a similar tenure. SFBs also provide monthly interest scheme in case of which interest is calculated for the quarter and
paid monthly at discounted rate over the standard FD rates. These higher rates help in attracting the depositors, especially
the ones looking for steady cash flows from these, such as senior citizens.

Depositors chase higher interest rates, prefer SFBs (one-year deposit rates)

7.25% 7.10%
7%
* 5.25% 4.75%
5%
4%
3%
2%
1%
0%
Jana SFB SuryodaySFB Equitas SFB HDFC Bank Kotak Bank

 

Note: Term deposi interest rate for one-year tenure, amount < 2 crores; rates are as of July 8 2020
‘Source: Company reports, GRISIL Research

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