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SBI's UPI Platform: High Failure Rates Raise Red Flags for Investors
Banking, Markets - April 14, 2025

SBI's UPI Platform: High Failure Rates Raise Red Flags for Investors

SBI’s UPI Platform: High Failure Rates Raise Red Flags for Investors

 

SBI’s UPI Transaction Failures: A Persistent Issue

The biggest public sector bank in India, State Bank of India (SBI), has been having trouble with high technical decline (TD) rates in its transactions using the Unified Payments Interface (UPI). According to data from the National Payments Corporation of India (NPCI), SBI’s TD rate rose sharply from 0.34 percent in February and 0.84 percent in January to 0.9 percent in March 2025.
Technical decline refers to UPI transactions that fail due to issues such as unresponsive servers or connectivity failures. While NPCI typically ensures 100 percent uptime for its system, the consistent failure rates from SBI’s infrastructure have raised concerns. This issue is particularly problematic because SBI plays a crucial role in the UPI ecosystem, accounting for the highest volume of transactions.

What is Technical Decline in UPI Transactions?

In the UPI ecosystem, a technical decline (TD) occurs when a transaction fails due to system-related issues, preventing the completion of a payment. For UPI to be effective, these issues must be minimal, as the platform relies heavily on its ability to process transactions seamlessly.
SBI’s rising TD rate suggests that the bank’s infrastructure may be facing technical challenges. This is in contrast to other major banks, such as HDFC, ICICI, Axis, and Kotak Mahindra, which all reported much lower TD rates, ranging between 0.02 percent and 0.13 percent in March. These low TD rates from private banks highlight a growing disparity in the reliability of UPI services across different banking institutions.

SBI’s Dominance in the UPI Ecosystem

SBI is an integral player in India’s UPI ecosystem, with its massive share of the transaction volume. The second-largest player in the market, HDFC Bank, handled 1.5 billion UPI transactions in March 2025; SBI processed 5 billion, more than three times that amount. SBI’s high TD rate, however, causes a bottleneck despite its dominance and affects the UPI system’s overall performance.
UPI has become the backbone of India’s digital payment infrastructure, accounting for 83 percent of all digital transactions. Therefore, any technical failures in a bank as significant as SBI can have a ripple effect, lowering the platform’s overall success ratio.

A Closer Look at Other Banks’ Performance

By comparison, banks like HDFC Bank, ICICI Bank, Axis Bank, and Kotak Mahindra Bank boast far lower TD rates, underlining the infrastructure disparity. For instance, HDFC Bank reported a TD rate of just 0.02 percent in March, whereas ICICI Bank and Axis Bank reported TD rates of 0.13 and 0.03 percent, respectively. This performance disparity raises questions about the efficacy of SBI’s systems in handling large transaction volumes.
Smaller public sector banks like Union Bank of India and Bank of Baroda also had better TD rates than SBI, suggesting that SBI’s high TD rate may be due to its unique infrastructure or technological problems rather than being a direct effect of being a public sector bank.

The Impact of High Failure Rates on UPI Users

For UPI users, SBI’s high TD rate can be incredibly frustrating. As UPI becomes an essential tool for digital transactions in India, payment failures become a significant barrier to a smooth user experience. These disruptions are particularly impactful when users attempt to make urgent or important payments, such as paying bills or transferring money for essential services.
Moreover, third-party apps that rely on SBI’s infrastructure, such as Google Pay, Paytm, and PhonePe, also face challenges due to these failures. Since these apps depend on banks like SBI as their payment service providers (PSPs), users often face delays, failed transactions, or errors during transactions.
As UPI grows in popularity and becomes the primary payment method for millions of users, ensuring a reliable and seamless experience is crucial. With SBI’s high TD rate, the platform risks losing customer trust and affecting the overall growth trajectory of digital payments.

The Role of NPCI and UPI’s Future

While SBI’s infrastructure struggles remain a problem, NPCI, the body responsible for overseeing UPI, maintains 100 percent uptime. This indicates that the underlying UPI system is functioning as expected, and the issue lies with individual banks like SBI. NPCI has also ensured that UPI outages are rare, but the recent disruptions—three in the last couple of weeks—highlight vulnerabilities in the system, particularly with partner banks that face technical or infrastructure-related challenges.
The most recent outage on March 26 was caused by a technical issue at NPCI itself, while the others were attributed to processing issues at partner banks due to financial year-end load. Such outages underscore the challenges faced by UPI’s ecosystem, particularly as more users and transactions come online.

Final Thoughts: What’s Next for SBI and UPI?

SBI’s high TD rate poses a considerable risk to its reputation and to the UPI system as a whole. As the leader in India’s digital payments landscape, SBI must address its technical challenges to maintain its position in the UPI ecosystem. Failure to improve its infrastructure could erode customer trust and negatively affect the entire UPI platform.

For the broader UPI ecosystem, it’s essential for all participating banks to invest in the technology and systems that ensure seamless payments. Although SBI’s high TD rate hinders UPI’s overall performance, it can help improve UPI’s success ratio and the digital payment system for millions of Indian consumers if its infrastructure is upgraded properly.

 

 

 

 

 

 

 

 

 

 

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Microfinance sector recorded surge in NPAs to Rs. 50000 crore
Banking, Business, Equities, Markets - February 27, 2025

Microfinance sector recorded surge in NPAs to Rs. 50000 crore

Microfinance sector recorded surge in NPAs to Rs. 50000 crore

 

Microfinance sector in India recorded non-performing assets (NPAs) of Rs. 50,000 crore at the end of December, 2024. The NPAs of the microfinance sector is about 13 percent of the gross credits. Despite the efforts of RBI to mitigate risk by lowering capital allocation requirements for risky unsecured loans, the NPAs of the microfinance sector hit an all-time high record of Rs. 50,000 crore.

 

Hike in portfolio at risk (PAR)

The portfolio at risk which could convert into NPA surged to 3.2 percent of the total credit. It was only 1 percent last year. Overall scenario of the microfinance loan portfolio indicates serious concerns about the credit discipline prevailing in the sector. 

 

Cautious Approach

In the midst of a hike in NPAs and the portfolio at risk in the microfinance segment, industry leaders in the market are looking at the future with a careful approach. Managing director of IndusInd Bank, Sumant Kathpalia said that the bank continues to have a prudent approach in terms of the microfinance segment. He stated that the bank’s customer base is indicating early signs of stability and it will be highlighted in the first quarter of the financial year 2026. Though, there is a probability of a rise in slippages in the upcoming quarter of the financial year 2025. 

 

Total share of NPA in microfinance segment

According to the information of Crif High Mark, the total proportion of NPAs, which are due for more than 90 days in the microfinance segment, is about 13 percent.  The total credit not paid for about 91 to 180 days accounts to 3.3 percent of the total loans. Also, the loans not paid for more than 180 days are recorded at 9.7 percent of the total loans.

 

The information does not include the data for the previous six months. It is likely for NPAs of the microfinance sector to hike to 14 percent of total loans or Rs. 56,000 crore, if the previous six months’ data is added to it. 

 

Performance of microfinance sector

In the past three quarters of the financial year, the microfinance sector in India recorded contraction in growth. Even though lenders tried to clean up their financial records by writing off bad assets. Another reason for this subdued performance is giving too many credits to low-income borrowers in order to achieve high growth quickly. It led to further expansion in defaults in the microfinance sector. 

 

Microfinance credit is generally given to women from low-income households with income less than Rs. 3 lakh on yearly basis. These loans usually do not have any collateral leading to becoming risky in terms of economic issues. 

 

Effect on Financial institutions and banks

The hike in NPAs in the microfinance sector indicates high risk for banks largely operating in unsecured lending segments. Though, every unsecured credit does not come in the microfinance sector. Some of the banks with large unsecured loans and currently facing high pressure in the loan segment are IDFC First, RBL Bank, Bandhan Bank, and IndusInd Bank. In the past, Bandhan Bank was a microfinance institution which later changed into a universal bank. At the present times, the bank has about Rs. 56,120 crore of unsecured loan portfolio and 7.3 percent of these unsecured loans are NPAs at the end of December, 2024. 

 

Recently RBI took the decision to lower capital requirement on micro loans given to MFIs to about 75 percent, which was earlier 125 percent. It aided in releasing more capital for creditors to lend and expand their businesses. The unsecured loans offered for the purpose of consumption remain at 100 percent of capital requirement.

 

Major Concerns of small finance banks and NBFCs

Due to the rising NPAs and potential risk of NPAs in microfinance lending, small finance banks like Utkarsh and ESAF recorded net losses in the third quarter. Small finance banks like Ujjivan, Equitas, Jana, and Suryoday recorded contraction in net profits by about 64 percent, 67 percent, 18 percent, and 42 percent on YoY basis, respectively, in the third quarter.

 

In terms of NPAs in microfinance loans in universal banks is recorded to be around 15.7 percent. On the other hand, total NPAs in microfinance loans in small finance banks stood at 18.3 percent. 

 

NBFC-MFIs like Spandana and Fusion broke their financial agreement due to recording quarterly losses in a row. The main reasons for these losses were expansion in the number of bad loans and hike in funding costs. 

 

In the past, the microfinance sector acted as a main driver for financial inclusion in the economy. It is now facing serious concerns as lenders are unable to balance both asset quality and growth of the finance institutions. 

 

 

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Easing of risk weights on loans given to MFIs and NBFCs
Banking, Business, Equities, Markets - February 26, 2025

Easing of risk weights on loans given to MFIs and NBFCs

Easing of risk weights on loans given to MFIs and NBFCs

 

On 25th January, 2025, Reserve Bank of India (RBI) lowered the capital requirement leading to easing up of giving micro loans and loans to microfinance institutions (MFIs) and non-banking finance companies (NBFCs).  RBI lowered the risk weight to 100 percent for NBFCs. These new regulations will come into effect from 1st April, 2025. The main aim of the Reserve Bank of India is to increase liquidity, better loan flows, and also boost growth in the economy. 

 

Actions taken by RBI

In order to support economic growth, RBI declared a contraction in policy rate by 25 basis points which accounts to 6.25 percent on 7th February, 2025. In less than a month, RBI took the decision of lowering the capital requirement against loans given to NBFCs and MFIs. 

 

Prior to this, the risk weights on bank credits to Non-Banking Financial Companies (NBFCs) was expanded to 125 percent from 100 percent.  The reason for the implementation of this action was to limit unsecured loans, which had expanded to 25 percent in the month of October, 2023. Following expansion in risk weight, NBFCs faced high borrowing costs leading them to demand for relief. 

 

The recent decision of the RBI restored the risk weights on credits to NBFCs back to 100 percent. It will not only lead to expansion in liquidity but also lower borrowing costs for NBFCs giving them relief from the persistent concerns about high borrowing costs.

 

Impact of actions taken by RBI

The recent steps of RBI to lower capital requirement will lead to capital of around Rs. 40,000 crore more available for the banks. The banks can now give credit up to Rs. 4 lakh crore to AAA-rated entities. It will lead to lower funding costs,  rise in liquidity, and better margins for institutions. Its goal is to have strategic growth in the economy and to resolve the issue of subdued bank loans to NBFCs.

 

Changes in risk weight on loans to MFIs

Prior to this decision, banks had to have a capital requirement of 125 percent on loans given to MFIs. The aim of this regulation was to lower potential risks. It made lending to MFIs expensive. 

 

In a recent decision of RBI, the risk weight is assigned to be 75 percent on loans given to MFIs which will encourage more credit to MFIs. The loans given for consumption purposes are assigned a risk weight of 100 percent.

 

Reasons for lowering capital requirement 

The decision of RBI to restore risk weight highlights that potential risk prevailing in the economy of unsecured credit has contracted. The previous measures of RBI to expand risk weight has helped the economy and the banking sector. Though, it affected NBFCs, particularly small NBFCs as they faced the issue of high funding costs. Many large NBFCs had to keep their liquidity levels high in order to have enough funds to maintain lending activity.

 

In the current financial year, the bank loans to NBFCs are recorded to be sluggish. Also, contraction in liquidity in the market was observed. These are reasons why RBI lowered capital requirements and also to prioritise loan flow to under-served segments for growth in the economy. 

 

It is now time for the economy to target strategic economic growth. It will give more access to funds leading to strong growth in the sector. 

 

Benefit to banks

The change in regulations of RBI will not only help MFIs and NBFCs but also banks in the sector. The credit system of NBFCs generally functions by taking loans from banks and then using that loan amount to give loans to its customers. The lowering of capital requirement will likely lead to lower interest rate to NBFCs by banks. It will lower the funding costs of NBFCs. 

 

Bandhan Bank is considered to get more gains as a quarter of its portfolio used to attract 125 percent risk weight but now it will attract 75 percent risk weight. It will aid the bank to lend more as it will have more capital to give credit. It will lead to improvement in its profit margins.

 

In conclusion, the main aim of the RBI is to have strategic growth by lowering funding costs and improvement in margins for the sector. It also gives relief in terms of loans given to NBFCs and MFIs and addresses the issue of subdued bank credits to NBFCs. 

 

 

 

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Easing of risk weights on loans given to MFIs and NBFCs
Banking, Equities, Markets - February 25, 2025

Easing of restrictions on New India Co-operative Bank

Easing of restrictions on New India Co-operative Bank

 

Overview

With effect from February 27, 2025, the Reserve Bank of India has loosened restrictions on New India Co-operative Bank, permitting withdrawals of up to Rs 25,000. This comes after the bank’s liquidity status has been evaluated. The general manager of the bank was also taken into custody on suspicion of embezzling Rs 122 crore.

 

Depositors can withdraw

Starting February 27, the Reserve Bank of India (RBI) has permitted ₹25,000 withdrawals to depositors of the fraud-plagued New India Cooperative Bank, providing some respite. More than half of all depositors would be able to withdraw their full balances with the aforesaid relaxation, and the remainder depositors will be allowed to withdraw up to ₹25,000 from their accounts, according to the RBI.

 

Depositors can make this withdrawal using the bank’s ATM channel or in-branch. It was explained, however, that the total amount that any depositor may withdraw will be ₹25,000 or the amount that is available in their account, whichever is less.

 

With effect from February 25, the RBI has also reorganized the Committee of Advisors (CoA) to the Administrator. CoA members include former State Bank of India general manager Ravindra Sapra, former Saraswat Co-operative Bank Ltd. deputy general manager Ravindra Tukaram Chavan, and chartered accountant Shri Anand M. Golas. However, the Administrator has not changed.

 

RBI had issued AID

As a precautionary step to safeguard depositors’ interests, the RBI issued All Inclusive Directions (AID) to the bank on February 13, 2025, prohibiting any withdrawals from current, savings, and other accounts. The central bank then replaced its Board on February 14, 2025, and established an Administrator and a Committee of Advisors (CoA) to supervise the situation and guarantee the stability of the bank.

 

The RBI was developing a proposal to permit extraordinary withdrawals for personal and medical situations for depositors of the financially troubled New India Co-operative Bank. In the event of a bank failure, savings up to Rs 500,000 are guaranteed under present regulations, and payouts must be given within 90 days. A request for comment was not immediately answered by the RBI.

 

Citing worries about the bank’s financial condition and ongoing supervisory challenges, the RBI placed severe limitations on the bank last week, forbidding it from issuing new loans, suspending deposit withdrawals for six months, and designating an administrator.

 

Story so far

On February 17, Hitesh Mehta, the bank’s general manager and head of accounts, was taken into custody on suspicion of embezzling Rs 122 crore. Mehta admitted to giving a real estate developer Rs 70 crore to finance an SRA (Slum Rehabilitation Authority) project in Charkop, Kandivali, according to a police official.

 

Mehta and developer Dharmesh Paun were detained in connection with the investigation and placed under police prison until February 1, 2025.  The bank’s interim CEO, Devarshi Ghosh, filed the case at the Dadar police station on Friday. The Mumbai police’s Economic Offences Wing (EOW) took over the case after the complaint was filed, and it is currently investigating the alleged theft at the bank’s Prabhadevi and Goregaon branches.

 

Conclusion

Thus, the RBI is supporting the New India Co-operative Bank and its depositors by easing restrictions. The checking of the bank’s liquidity position has yielded positive results. This increased facility has given relief to depositors as above 50% of them are able to access all of their funds while some of them are permitted to withdraw Rs 25,000. Steps have also been taken to restructure the bank by changing the Committee of Advisors and placing the administrator under active oversight. This comes after the recent arrest of the bank’s general manager, Hitesh Mehta, for suspected embezzlement of funds to the tune of 122 crore rupees, thus exposing shocking levels of corruption and internal inquiry into the financial mismanagement. Despite challenges, the RBI aims to balance the interests of the depositors and restore order to the meandering waters of financial chaos still looming around the bank.

 

 

 

 

 

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Hike in limit on small-value credits of Urban co-operative banks

 

 

 

 

 

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Hike in limit on small-value credits of Urban co-operative banks
Banking, Equities, Markets - February 25, 2025

Hike in limit on small-value credits of Urban co-operative banks

Hike in limit on small-value credits of Urban co-operative banks 

 

 

On 24th February, 2025, Reserve Bank of India made an announcement regarding raising the credit limits for urban co-operative banks (UCBs). It stated that the UCBs can now classify their loans of up to 0.4 percent of Tier I capital or Rs. 25 lakh in category of small-value credits based on whichever of them is higher. The limit of the loans per borrower is increased to Rs. 3 crore which was earlier Rs. 1 crore per borrower.

 

Changes in regulations for UCBs

In the past, the classification criteria of small-value loans for UCBs was credit up to Rs. 25 lakh or around 0.2 percent of Tier I capital. The limit of the loans per borrower was about Rs. 1 crore.

 

Reserve Bank of India made changes in the classification of small-value loans of UCBs making it more flexible. It has raised the ceiling limit of loan to Rs. 3 crore per debtor. It also gave the right to categorize loans as small-value loans in case of loans of up to 0.4 percent of Tier I capital or Rs. 25 lakh. These changes in norms will be applicable by immediate effect. 

 

UCBs in India can now categorize big loans as small-value credits as well. This announcement of RBI came following the business restriction on New India Co-operative Bank and also the board of the bank was superseded. The reason for this is lack of governance in the bank.

 

Changes in regulations of Housing loans

Apart from increasing the limit on small-value credits, RBI has taken steps to increase the total exposure limit for residential loans to around 25 percent of its total credits and advances. It allowed UCBs to now allocate a bigger portion of their loan portfolio for residential mortgages. Except for housing loans, the exposure of UCBs in the real estate sector is limited to 5 percent of their total loans and advances. It highlights RBI’s actions to diversify loan portfolio as well as make it balanced. 

 

Reserve Bank of India has made some changes in the limits on residential loans for individuals for various tiers of UCBs. These new changes are in the band of Rs. 60 lakh to Rs. 3 crore. According to central bank of India’s information, the limits on housing credits for individuals in tier-I and tier-II are Rs. 60 lakh and Rs. 1.40 crore, respectively. The limit for tier-II and tier-IV are Rs. 2 crore and Rs. 3 crore, respectively. 

 

Extension of timeline for provisioning on security receipts

Reserve Bank of India extended the time limit for keeping aside money for investments in security receipts (SRs). Earlier, the time limit was till the financial year 2025-2026. The time limit is extended till the financial year 2027-2028. It will aid in UCBs having a substantial amount of time to comply with the regulations and also manage their finances better. Despite this extension, the provisions made for the specified SRs earlier should be maintained in the future as well.

 

In the previous financial year, RBI extended the timeline to achieve the target of minimum percentage of small value credits in the total loans and advances of the UCBs until March 2026. 

 

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Hike in limit on small-value credits of Urban co-operative banks
Banking, Equities, Market News, Markets - February 24, 2025

Personal Loan Growth contracted to 13.7 percent in the third quarter of FY25

Personal Loan Growth contracted to 13.7 percent in the third quarter of FY25

 

Overview

Personal loan growth has slowed to 13.7% by December 2024, down from 15.2% in September, due to regulatory warnings. Total bank credit growth also slowed, despite the fact that all population categories continued to rise by double digits. Lending for commerce, finance, and professional services increased, while credit for agriculture and manufacturing remained stable.  Aggregate deposits increased by 11%, with term deposits showing significant growth.

 

Personal Loan Growth slowed down

Personal loan growth slowed in the December quarter due to regulatory concerns about potential overheating. According to quarterly data from the Reserve Bank of India, the annual growth rate for the personal loan segment was 13.7% in December 2024, down from 15.2% in September. Total bank credit growth also slowed to 11.8% in December 2024, down from 12.6% in September.

 

Further, at the end of January this year, RBI released key data according to which, bank lending to the personal loan segment moderated in December to 14.9% year on year, owing mostly to a reduction in growth in other personal loans, vehicle loans, and credit card outstanding. The RBI has issued statistics on sectoral bank credit deployment for December 2024, which was collected from 41 select commercial banks and accounts for approximately 95% of total non-food credit deployed by commercial banks.

 

The banking regulator stated that all population categories in rural, semi-urban, urban, and metropolitan branches of banks experienced double-digit credit growth, albeit with some slowdown which was true for both public and private sector banks.

 

Credit distribution

Previously, the RBI had presented that the growth in non-food bank credit as of the fortnight ending December 27, 2024, slowed to 12.4% on a year-over-year (y-o-y) basis from 15.8% in the same fortnight the year before. The data showed that bank lending to agricultural and related businesses increased by 12.5% year over year as of the fortnight ending December 27, 2024, compared to 19.4% for the same fortnight the year before.

 

Additionally, industry credit growth stayed relatively constant at 7.4% annually. Out of all the major industries, food processing, petroleum, coal products and nuclear fuels, and all engineering had the highest growth rates. Nonetheless, the infrastructure segment’s credit growth slowed.

 

Further, credit growth in the services sector also slowed to 13.0% year-over-year as of the fortnight ending December 27, 2024. For the equivalent two weeks of the prior year, the growth was 20%. The primary trigger of the moderation was the slower expansion of lending to trade segments and non-banking financial companies (NBFCs). However, credit growth for professional services and computer software increased year over year.

 

Recently, RBI stated that the credit to agriculture and industry sectors also saw some slowing in growth, while lending to commerce, finance, and professional/other services increased in the third quarter. About half of the loans granted by banks had interest rates ranging from 8% to 10%, while approximately 16% had interest rates less than 8%. According to the RBI, the remaining loans carried interest rates of 10% or above.

 

Deposits saw an uptick

Meanwhile, aggregate deposits increased by 11% in December 2024, compared to an 11.7% rise a quarter earlier.  Granular data revealed that approximately 80% of incremental term deposits mobilized between April and December 2024 were held in the one to three-year maturity bucket, indicating a potential lag in the softening of banks’ deposit costs. The proportion of total term deposits with an interest rate of 7% or more climbed from 61.4% to 70.8% by December 2024.

 

Term deposits increased 14.3% year on year, while savings deposits increased by 5.1%.  This resulted in a further increase in term deposits’ percentage of total deposits to 62.1% at the end of December, up from 60.3% the previous year.

 

Q3FY25 Banking Sector Performance

The banking industry reported a mixed quarter, with modest business momentum, high credit costs, and moderate margins. As observed in both public and private sector banks, the growing cost of deposits and heightened competition for funds contributed to the ongoing reduction in net interest margins (NIMs). All segments saw a slowdown in credit growth, with corporate lending recovering slowly as a result of a muted capital expenditure cycle and pressure on large-ticket loan prices.  Risks associated with asset quality are still a major worry, especially in unsecured lending, where personal loan and microfinance portfolio slippages are still common.

 

Systemic credit offtake as of December 31, 2024, was INR 175.9 trillion, representing an 11.3% YoY growth rate that is lower than the 12.6% growth rate from the previous year (excluding merger impact).  Our coverage’s overall credit growth stayed modest at about 10.3% year over year. Secured lending, such as home, auto, and SME loans, drove expansion in retail credit, which continued to grow albeit at a slower rate. A slowdown in unsecured lending, which includes credit cards, personal loans, and microlending, was brought on by tighter regulations, increased risk perception, and an increase in delinquencies. HDF Commercial Bank continues to show a modest gain of 3.0% YoY (+0.9% QoQ), while Bandhan bank led the growth with 15.6% YoY (+1.1% QoQ).

 

Conclusion

To sum up, legal measures led to a decrease in the growth rate of personal loans in December 2024. The expansion of bank credit also moderated.  The lending development to professional services, finance, and commerce grew while Manufacturing and agriculture remained stable.  Investor’s shifts in their preferences resulted in deposit growth, especially term deposits.  The banking industry had mixed results during Q3FY25 so far with concerns regarding asset quality, most notably in unsecured lending, loan growth has slowed with a shift toward an emphasis on secured lending, which is a more positive quality for the industry.

 

 

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RBI concerns over Small Finance Banks
Banking, Equities, Markets - January 30, 2025

RBI concerns over Small Finance Banks

RBI concerns over Small Finance Banks

Overview
It has been reported that the Reserve Bank of India (RBI) has become uneasy about a few small financing banks (SFBs) because of increased asset quality stress and excessive concentration risks.

According to three executives monitoring the industry, the banking regulator has also instructed these banks to look into mergers in order to increase their size and reduce the risks of concentration. According to one of the individuals, the RBI has “close supervision” over small finance institutions. Additionally, one solution that has been considered at the regulatory level to alleviate the issues is bank consolidation.

According to another executive, the regulator met with these lenders’ management a few months ago. The supervisory stakeholders were also concerned about gaps in succession planning and corporate governance at several of these SFBs.

NPAs on the rise
Due to the continuous strain in the microfinance industry, which saw the average gross non-performing assets (NPA) increase to an 18-month high of 11.6% at the end of September 2024, small financing institutions with a larger percentage of microloans are in the most difficult position.

Collectively, non-performing assets (NPAs) accounted for 15.3% of these lenders’ total microlending portfolio. Although industry-level data until the end of December is not yet available, quarterly results indicated that the overall sectoral asset quality is probably going to deteriorate.

Concentration Issues remain persistent
Concentration issues affect small financing banks in two ways. First, a lot of people are heavily exposed to the microfinance industry, which has been experiencing a lot of stress. Second, a small number of these banks are highly exposed to areas of greater stress.

According to the CEOs of major firms, these problems might be resolved by combining these banks or by merging with larger organizations that have substantial financial resources. Further, as per a prominent microfinance practitioner, it might make sense for banks that operate in different regions to merge since it would mitigate the concentration risk.

A Standing External Advisory Committee (SEAC) was previously established by the RBI to review applications for Small Finance Banks (SFBs) and Universal Banks. The Reserve Bank of India’s Department of Regulation would provide the committee with secretarial support, the RBI had stated in a release.

Category Risks
Coming to category risks, for example, ESAF Small Finance Bank’s native state of Kerala and its neighboring state of Tamil Nadu account for 57% of its gross advances, with unsecured loans accounting for 56% of the total. In a similar vein, Utkarsh Small Finance Bank has 916 banking locations spread over five states: Uttar Pradesh, Bihar, Jharkhand, Odisha, and Maharashtra. Of these, two-thirds of total loans fall into the category of unsecured microfinance.

That area is the primary focus of the Northeast Small Finance Bank, which combined with the fintech startup Slice, based in Bengaluru.

The majority of SFBs reported yearly increase in deposit mobilization that was higher than the average for the banking sector. Despite starting from a low foundation of Rs 6,484 crore a year ago, Suryoday leads the field with a 49.7% year-over-year rise to Rs 9,708 crore at the end of December.

In the third quarter, the bank’s gross non-performing assets (NPAs) increased to 5.5% of its total advances of Rs 9,563 crore. While lending increased 16% to Rs 19,057 crore, Utkarsh recorded a 33.5% year-over-year increase in deposits to Rs 20,172 crore.

The SFB ecosystem was established by the RBI to improve loan availability to micro and small businesses as well as the agricultural industry.

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Banking, Business, Equities, Markets - January 16, 2025

Infrastructure Expectation in Budget 2025-26

Infrastructure Expectation in Budget 2025-26

Overview and Current Scenario
India’s economic development in FY25 was hindered by limited public capital expenditure (capex), which was mostly caused by limitations associated with the election. Project execution was hampered by the Model Code of Conduct’s implementation during the state and parliamentary elections, especially in the first half of FY25, when total government capital expenditures fell 12.7% year over year.

In Q1 of FY25, the central government’s capital expenditures fell 35 percent year over year. In Q2, they recovered moderately, rising 10.3 percent year over year. Furthermore, state governments’ emphasis on populist welfare programs, which sparked discussions about fiscal discipline, also reduced the amount of money available for infrastructure projects. With just a few state elections scheduled for 2025, public capital expenditures are expected to pick up steam again, propelling advancements in areas like ports, roads, defense, and electricity.

Capex Trend
Infrastructure is still a priority even though capital spending (capex) has decreased by 12.3 percent year-to-date from April to November of FY25. Only 42% of the allocated capital expenditures had been used by November, down from 51% in FY24. This suggests a large backload of spending that is anticipated to occur in the second half of the fiscal year.

Q3 Results might lead to an increase in capex
Strong Q3 ordering activity points to a possible change in momentum as the fiscal year goes on. The government has made significant announcements about trains, defense, and power.
According to ICRA’s note, the significant projected shortfall in FY2025 (Rs 9.7 trillion) compared to the target (Rs 11.1 trillion) would allow for a 12–13 percent increase in FY2026 capital expenditures, or Rs 11 trillion, which would support growth in the upcoming fiscal year and crowd in private capital expenditures.

Sectoral Capex Increment in the Budget
In order to control inflation and the budgetary crisis, the government has been selectively prioritizing a small number of projects and sectors in order to reduce expenditure. Despite the bunching of a few orders in the remaining months of the current fiscal year, the government might still fall short of its initial capital expenditure targets given the current run rate. There are already rising expectations that the government will increase its capital expenditure budget for the upcoming year.

The Union Budget 2025–26 is anticipated to address these gaps with increased capex. The focus will likely be on sectors with high economic multiplier effects and a proven capacity for timely project execution, more so in the light of supporting economic growth. India’s GDP growth slowed to an estimated 6.4 percent in FY25, the weakest in four years, due to global headwinds and subdued private investment.

But in FY26, GDP growth is expected to rebound to 6.5–6.8 percent. For example, FICCI has suggested a 15% increase in capital expenditures for FY26 in order to sustain economic momentum, with a focus on investments in productive infrastructure that create long-term growth and jobs. It is anticipated that significant financial investment will be made in the fields of highways, railroads, defense, and renewable energy, just as in the past. Additionally, in anticipation the federal government will keep pushing states to undertake important infrastructure projects by allocating funds.

Ernst & Young Report on Infrastructure Sector Expectation from the Budget
According to EY, the shortfall will need to be made up in FY26 because the capital expenditure was significantly lower in FY24 due to the election. India’s goal of becoming a $7 trillion economy by 2030 is predicted to require $2.2 trillion in infrastructure investment, underscoring the necessity of enacting strong fiscal policies. Spending on infrastructure also frequently has a multiplier effect, with each rupee spent having a threefold effect on GDP. Public-private partnerships (PPP) in major projects involving ports, airports, roads, etc., require a renewed focus and innovative policy. This can be achieved through enhanced measures for viability gap funding (or “VGF”) and supportive policies and regulations.

Tax measures to boost infrastructure
Some of the tax measures to be implemented to support infrastructure include establishing a framework for fiscal consolidation for intragroup Special Purpose Vehicles (SPVs) that permits the offset of losses from one SPV against gains from other SPVs; reduced tax rates under a special and simplified tax regime for green energy and infrastructure projects; encourage business involvement in large-scale space initiatives through tax breaks; introducing a favorable tax framework for carbon credits; offshore wind projects were the focus of the VGF, but this would not be feasible without the importation of foreign cash, technology, and expertise. It would be beneficial to simplify the tax code for these kinds of initiatives.

Conclusion
It is highly anticipated that Budget 2025 would introduce a number of programs to accelerate the development of infrastructure. Private participants would be encouraged to plan their involvement if ambitious asset monetization programs received additional advice.

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India plans to divestment of 5 public sector banks

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Microfinance sector recorded surge in NPAs to Rs. 50000 crore
Banking, Business, Equities, Markets - January 16, 2025

SFBs to face high NPAs and slow credit growth in the financial year 2025

SFBs to face high NPAs and slow credit growth in the financial year 2025

The Small Finance Banks (SFBs) in India are expected to see an increase in Non-performing Assets in the financial year 2025, as per the information given by ICRA, a credit rating agency. The rating agency further stated that the asset (credit) growth will observe a weak growth. This weakening growth is expected to be around 18 to 20 percent compared to the 24 percent growth in the financial year 2025. Previously, it has experienced a thriving growth in the last two financial years.

Increase in Gross NPAs ratio
The Small finance banks’ gross non-performing assets ratio surged to 2.8 in the month of September compared to the previous ratio of 0.5 percent. The reason for this increasing indebtedness is problems in the microfinance sector. It has affected the asset quality of the SFBs badly. ICRA underlines that these SFBs will face issues while maintaining their asset (loan) quality.

The microfinance sector in India is facing a number of challenges such as increase in overdue loans, operational challenges, and regulatory issues. Most of the small finance banks are active in the microfinance segment only. The growing concerns in the microfinance segment is also considered as the reason for the slow growth in credit creation in the small finance banks.

Diversification of asset class
For many years, the small finance banks segment has been working on diversifying their various services offerings. Currently, these products consist of many retail asset (loan) types such as business loans, gold loans, and loans against property. housing loans, and auto loans. This increase in the secured asset class has led to a fall in share of unsecured loans in the total asset class of these banks.

ICRA’s head for the financial sector rating, Manushree Saggar stated that the matter of concern in the microfinance industry indicates that the possible growth drivers in the financial year 2026 will be secured asset classes as many SFBs are moving towards diversification of portfolios. The SFBs are taking measures towards reducing their dependency on unsecured asset classes.

Issues with CASA
A significant proportion of current and savings account deposits (CASA) in banks is important in terms of banks’ financial health as well as its ability to generate credit availability. Currently, the share of CASA of the small finance banks recorded 28 percent of growth by the month of September, 2024. Despite this, the growth in CASAs of SFBs is considerably smaller compared to the CASA proportion of universal banks.

The small finance banks in India face the issue of increasing the share of low-cost CASA. In the month of September 2024, the credit-deposit ratio of SFBs fell to around 89 percent compared to the credit-deposit ratio of 97 percent in the month of March 2023. This challenge is expected to carry on in the upcoming term as well.

The rating agency also anticipates that the small finance banks will face the issue of increasing competition in deposit levels. This will lead to a shift of small finance banks in the direction of term deposits, which have high interest rates. This shift will lead to a hike in funding expenses.

Other issues of SFBs
The small finance banks are suffering from the issue of rising operating expenses. The reasons for higher operational cost is expansion of branches, increase in staff costs, and also the increasing measures taken for tackling the NPA debtors. These issues are largely leading to hikes in operations expenses of these banks.

Adverse impact on Profitability
The hike in asset cost is anticipated to slow down the total profitability ratio of the small finance banks in the financial year 2025. At the industry level, the ratio of return on assets is expected to fall at a range of 1.4 percent to 1.6 percent in the financial year 2025 compared to the return on asset ratio of 2.1 percent in the financial year 2024. Overall, these challenges will impact the margins of small finance banks adversely.

The future prospects for the small finance banks highlights an adjustment period. It has to go through these challenges of credit creation, high NPA, and operational costs. At the same time, the SFBs has to find better growth opportunities through the process of increasing the proportion of secured assets and also diversification of its portfolio.

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India plans to divestment of 5 public sector banks

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Easing of risk weights on loans given to MFIs and NBFCs
Banking, Business, Equities, Markets - January 15, 2025

India plans to divestment of 5 public sector banks

India plans to divestment of 5 public sector banks

The Indian government might allow divestments of state-banks through the process of stake sales or the lenders selling their own shares to large investors. It will help banks to meet requirements of minimum public holding.

The Indian government could possibly allow public sector banks such as the Central Bank of India, Punjab and Sind, Bank of Maharashtra, UCO Bank, and Indian Overseas Bank to lower ownership stake through share sales under the authority of Department of Investment and Public Asset Management (DIPAM). The second option is banks selling their shares to large investors.

Purpose of divestment
The aim of the divestment is to decrease the government’s holding in these state-run banks to lower than 75 percent. It will improve banks’ cash flows and financial stability. It helps in increasing liquidity of these lenders. These banks’ ability to lend can increase due to this. It will ultimately support in increasing the liquidity and credit creation capacity in the midst of economic uncertainty. According to the analysts, the asset quality of the banking sector has reached its high in the midst of the slowdown in economic growth.

Current government holdings
According to the data of the December 2024 quarter, the government’ stake is about 79.6 percent in the Bank of Maharashtra. While, the government holdings in the Central Bank of India and UCO bank is about 93.1 percent and 95.4 percent, respectively. The government ownership in PSU banks such as Punjab and Sind Bank and Indian Overseas Bank is about 98.3 percent and 96.4 percent, respectively. The total excessive government ownership in these following five state-run banks is close to Rs. 50,000 crore on the basis of the current share price.

Shares of State-run Bank’s Performance
When the news was circulated about the possibility of stake sale of five PSU banks, it led to the shares of the PSU banks surged to 20 percent. While the stocks of Indian Overseas Bank rise to about 19.24 percent. Also, the stock of UCO Bank surged to around 20 percent since October, 2003.

In the previous year, bank stocks observed an indifferent trend. Despite this, investors showed their interest in public sector stocks. The Nifty PSU bank index increased close to 4 percent in the previous twelve months compared to the fall in the NSE Nifty Private Bank index to around 3.6 percent.

According to the price-to-book metric, shares of these five state-run banks are not inexpensive compared to its other bigger peers. Price-to-book is a common financial metric used for comparing a company’s market value with its book value for the purpose of the valuation of the company.

The largest state-run bank of India is State Bank of India (SBI), which accounts to a price-to-book value of 1.44 times. As per the data of Bloomberg, the range of book value is 1.43 to 3.62 times for the five selected state-run banks – Bank of Maharashtra, Indian Overseas Bank, Punjab and Sind Bank, Central Bank of India, and UCO Bank.

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Railway Sector’s Budget Allocation and Stock Performance: Insights for Investors

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