RBI tells small finance banks to focus on business models, governance

In a meeting with the heads of small finance banks (SFBs) on Friday, the Reserve Bank of India (RBI) advised them to pay close attention to their business models and governance, in the light of recent developments in the sector. The meeting was led by RBI deputy governors MK Jain and M Rajeshwar Rao. “SFBs were advised to continue to evolve in tune with the differentiated banking licence given to them with proportionate growth in their capital base,” the RBI said in a statement.

Among other matters, asset quality concerns, including a viable portfolio mix and further strengthening of customer service and grievance redressal frameworks with commensurate information technology (IT) resilience, were discussed. The RBI also took note of suggestions and inputs from SFBs.

In the last few months, some SFBs have been in the news because of issues related to corporate governance and also problems on the credit quality front. In May, PN Vasudevan, MD & CEO, Equitas SFB, resigned, stating that he wished to focus on social and charitable commitments. In September 2021, Jaipur-headquartered AU SFB had seen senior executives resigning from its audit and risk departments. The bank had come in for criticism from the markets for lags in disclosing the resignations.

Earlier, in August 2021, then chief executive of Ujjivan SFB Nitin Chugh had stepped down from the role, citing personal reasons, amid speculation that there might have been differences between him and the older management. In January this year, the RBI approved the appointment of Ittira Davis as MD & CEO of Ujjivan SFB for a one-year period.

Historically, SFBs have had a sizeable portion of their loan books in the microfinance segment, which exposed them to asset quality risks during the pandemic. However, most of them improved their performance in Q4FY22.

In a post-results report on Ujjivan SFB, Kotak Institutional Equities wrote, “Ujjivan has weathered the twin issues of severe asset quality challenges during Covid and a confidence crisis due to CEO exit. Having gone through the pain (loss over FY 2021-22), the bank is now in a much better position with regards to asset quality, loan growth, deposit profile, margins and ultimately RoEs (return on equity).”

In an earlier meeting with heads of SFBs on August 27, 2021, the RBI had told them to work on the evolution of their business model and the need for enhancing board oversight and professionalism. They were also told to improve assurance functions and augment their IT infrastructure, taking into account the stress build-up due to Covid-19, along with requisite mitigation measures.

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