The Small Finance Banks continue to deliver higher deposit growth rates as compared to the overall banking industry. To really understand the reasons for such outperformance, we must look at the construct of the business model.

· Most SFBs have transitioned from NBFCs. In fact, the majority of them were micro-financing institutions at one point in time. This means that their asset-side (loans given) of the balance sheet delivers relatively higher yields (. Thus, they can offer a relatively better yield for their liabilities (deposits). This has helped them to attract more depositors.  

· SFBs were originally introduced to improve the financial inclusion in the country. They target the ‘unbanked’. These customers’ faced challenges during the covid times and now they are claiming its fair share appropriately.

· As the economy continues to deliver solid growth, it is also benefiting the lower-income groups. The aspirations are running high which SFBs have been able to tap better by providing an improved access to credit. This can be seen from the fact that SFBs have been able to garner a higher share of advances in the overall banking system over the last few years.  

Will the trend sustain?

We see the growth in SFBs as a multi-year trend. India as an economy lags massively in terms of banking penetration when compared to both Peers and the developed world. In its policy meeting last week, the RBI Governor highlighted both near and medium-term catalysts for strong economic growth in India. And as the empirical evidence suggests, there is no economic growth without credit growth. For the near-term triggers, Governor Das mentioned that the rabi crop for the current year should help rural economic activity and if the monsoon is normal (as expected till now), then the good Kharif season should help further. Further, employment in both the formal and informal sector is witnessing good growth as consumption has now started to pick up as inflation is being controlled. For the medium-term triggers, he emphasized the broadening of the private capex cycle, government’s increased capital spending and sustained momentum in the manufacturing and services sector.  

As the signs on the wall are getting clearer, we strongly believe that SFBs have a much bigger role to play in the overall banking sector. The important point is that for many people (especially in the lower income groups), SFBs are the first go-to private sector banks after PSUs. They have a strong appeal of a private sector bank (vs. PSUs) while offering a relatively better deal on smaller ticket transactions.

What should be the investment strategy > is it time to buy at current levels/book profits/accumulate at lower levels?

We at Purnartha have a long-term investment horizon and would suggest the same for any investor looking to participate in the equity markets. At the current juncture, where RBI expects strong 7.0% real GDP growth for FY25 with decline in inflation, we continue to remain invested in the SFBs. With increasing numbers of sectors participating, the Indian growth story continues to remain on a solid footing for multiple years to come. We would therefore add to our positions in SFBs if we get a better entry point due to market volatility.      

Preferred Picks?

We would not be able to comment on a single entity or stock but as mentioned above, we remain positive on SFBs and the overall banking sector. 

By Mohit Khanna, FM - Purnartha One Strategy

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