The Reserve Bank of India (RBI) has reportedly told some small finance banks (SFBs) who have high concentration risks and rising stress in asset quality to explore mergers.

The scale will allow these SFBs to lower risk concentration.

The RBI is also concerned about corporate governance and succession planning at some of these SFBs.

Small finance banks are under the close supervision of the RBI, business daily Economic Times reported.

The stress in the microfinance sector has put those SFBs who have a higher share of micro loans into new challenges.

Making matters worse is for those few SFBs who have large exposure to the geographic pockets of higher stress.

ESAF Small Finance Bank, for instance, has 57% of its gross advances in home state Kerala and the neighbouring Tamil Nadu while 56% of the gross advances are unsecured loans, ET has reported.

Utkarsh Small Finance Bank has 660 of 916 banking outlets in the five states of Uttar Pradesh, Bihar, Jharkhand, Odisha and Maharashtra, with two-third of the gross loans in the unsecured microfinance category.

Small finance banks help enhance credit supplies to micro and small enterprises and the farming sector. They also provide formal financing to the unbanked and the under-banked regions.