Small finance banks (SFB), which started in 2017 as a new category of banks, are serving the intended marginalised and under-served people and doing so profitably, according to an analysis done by RBI officials.

Most of these SFBs were microfinance institutions which converted themselves into lenders and thus got access to public deposits.

“The SFBs have been provided license with the objective to serve the under-served and marginalised sections of the society…preliminary analysis reveals SFBs to be leading in serving the priority sector,” the paper by Nitin Kumar and Sarita Sharma said.

Stressing that its assessment should not be considered as the view of the central bank, the study revealed a relatively high credit deposit ratio of SFBs. Most of them also displayed healthy profitability with further improvements in recent quarters.

Going into operational financials between March 2017 and March 2020, the study indicated that bank-level factors like efficiency, leverage, liquidity and banking business are significant in determining SFBs' profitability during this early period of operation. It can be noted that the first quarter of the FY22 was a difficult time for many of the SFBs, as the collection efficiencies declined because of the second wave of the pandemic.