Small Finance Banks - Business Outrank

The Reserve Bank of India (RBI) is tracking small finance banks due to a decline in their capital position since FY24. It turns out that 3 to 4 banks could need to enhance their capital buffers over the next few quarters in order to meet regulatory standards and to cover any possible losses that might occur. The capital deduction is 60 – 290 basis points in their CRAR, and the CET1 capital has reduced by 90 – 320 basis points. Out of these, AU Small Finance Bank, Jana Small Finance Bank, and Utkarsh Small Finance Bank have witnessed the highest decline. There are two rules for small finance banks: CRAR is 15 percent, and Tier-1 capital is 7.5 percent. Therefore, Utkarsh SFB's board has recently approved a plan to increase its capital by Rs 750 crore through fresh equity as its CET-1 capital has reduced to 17.94% from 21.49% in a year. The RBI officials recently held a meeting with the chiefs of small finance banks and raised concerns over their business models and capacity to raise capital. The regulator pointed out that most of the banks are still operating within their core business segments with limited product innovations, which makes them unattractive to investors. The other challenge is that private equity investors may not be willing to inject more capital because some of the funds that sponsored these banks are set to wind up their investment period. Against the background of depleted capital and doubtful investors, small finance banks will be under pressure to build up their capital and develop new strategies.

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