The Reserve Bank of India, in response to covid second wave, announced a series of measures to ensure adequate liquidity mostly targeting the vulnerable segments such as MSME, small businesses and small / last mile borrowers. Considering SFBs (small finance banks) deep regional reach and customer profile the regulator has proposed liquidity support to SFBs through a special 3-year long-term repo operation (SLTRO) of Rs100bn (~10% of total SFB loans).
This is primarily to encourage these entities to support small business units and adversely affected unorganised sector entities. We believe medium-term (3 years) liquidity support at 4% will be return accretive as well – A) open the avenue for incremental lending to their customer segment; B) margin and RoA accretive to the tune of ~21bps and ~16 bps, respectively (table 1), and C) opportunity to realign liability mix either by replacing high cost borrowing with retail deposits or cut bulk deposit rates.
* Targeted SLTRO for SFBs reflects their relevance and significance. RBI’s targeted SLTRO for SFB clearly suggests SFBs are one of the strong pillars of financial inclusion drive and delivering last-mile credit to mid / bottom of the pyramid households in most effective manner. Also, the size of SLTRO issuance of Rs100bn, equivalent to 10% of SFB loans, is sufficient to channelise the flow of credit to small & marginal borrowers.
* Margin is return accretive: We believe tapping 3-years liquidity under the scheme is a margin-accretive window for SFBs as it comes at a relatively lower cost with positive ALM. Funding under SLTRO would be available at 4% for lending to small borrowers, ticket-size capped at The prevailing funding cost of SFBs ranges between ~7- 8% (refer chart 2). The facility, if availed by SFBs, implied margin accretion between ~20-30bps at the prevailing funding cost. However, availing SLTRO funding would be subject to the availability of excess SLR securities and hence, margin benefit will vary from bank to bank
* Opportunity to realign borrowing mix – Since the commencement of SFB operations, its key focus has been on realigning liability mix skewed towards highcost bulk borrowing in its earlier avatar. Access to 3-year liquidity support at discounted rate will further encourage SFBs to avail SLTRO facility and re-align their borrowing mix. Robust mobilisation of deposits, as exhibited by SFBs in FY21, can be used to pay-off high debt as a part of incremental growth will be taken care by SLTRO funding. Further, it might also give an opportunity to SFBs to reduce bulk deposit rates by few basis points
* ALM positive – Most SFBs operate in MFI segment (average loan duration <18 months) and hence, availing funding under SLTRO for 3-years will be ALM positive and may help in managing liquidity better during testing times.
* PSL status to lending to small MFIs is a positive move. RBI, in order to ensure adequate funding to smaller MFIs proposed to reckon fresh lending to small MFI as PSL. Currently, cumulative AuM managed by smaller MFIs stands at ~Rs69bn, which is ~7% of total SFB loans.
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