What’s the deal with SBFC Finance? The company is making waves in financial services by focusing on micro, small, and medium enterprises (MSMEs). In this piece, I’ll break down SBFC’s lending strategy, contrasting it with microfinance institutions (MFIs), and weigh the possible pros and cons of adjusting its capital adequacy ratio to enhance return on equity (ROE). We’ll also touch on how rising costs of funds could influence SBFC’s competitive edge and the approaches it can take to keep profits flowing without losing customer goodwill.

Quality and Risk Management: The Cornerstones

First off, SBFC Finance’s lending approach is all about quality and managing risk. They’re not just throwing cash around; they’ve got standards. Only customers with a CIBIL score of 700+ are getting in, and they’re keeping their Loan-to-Value (LTV) ratios pretty low—42% for micro enterprises and 68% for gold loans. This is quite similar to the MFI strategy of being picky about who gets loans, ensuring sustainability through stringent credit criteria and lower LTVs.

The Allure of Secured Loans

A hefty chunk of SBFC Finance’s strategy is centered on secured loans. About 97% of their portfolio is secured—primarily against self-occupied residential properties. This is very much in the MFI playbook, using collateral or group lending to secure loans and boost repayment rates. By focusing on secured loans, SBFC Finance is playing it safe, helping avoid defaults and keeping a steady lending model.

Customization and Personalization

SBFC’s got a ‘PhyGital’ model, blending physical and digital channels to get a read on what customers are after. Personalization is key for keeping customers, building that trust factor. MFIs know this well, adjusting their offerings to suit individual needs to keep clients satisfied and committed.

Broadening Horizons

With 152 branches spread across 18 states and union territories, SBFC Finance is making its presence felt in tier II and III cities. Expanding reach to underserved areas is crucial, and MFIs have similar tactics to enhance sustainability. More branches mean more customers, after all.

Tech-Savvy Operations

Using tech to boost customer experience is also a big part of SBFC’s game plan. Digital platforms are in play to streamline loan processes and improve service. MFIs get this too, using mobile banking and other digital tools to keep customers happy.

Building Trust and Loyalty

Consistency and fairness in interactions is what SBFC Finance banks on to build trust. The company aims to resolve issues swiftly and provide personalized financial advice to keep customers coming back. Trust, transparency, and quick problem resolution are essential for keeping long-term relationships, something MFIs understand well.

Sustainable Growth

SBFC is committed to growing sustainably, balancing profits with social and environmental responsibilities. The goal is to deliver consistent and quality growth while being conscious of environmental and social impact. It’s the MFI way too, focusing on sustainability through regulations and adhering to government policies.

Understanding the Capital Adequacy Ratio

Changing the capital adequacy ratio could have major implications for SBFC’s financial health. Here’s a look at the potential wins and losses:

Silver Linings

1. Boosted ROE: Infusing more equity can give a serious ROE boost. SBFC’s plan to inject Rs. 250 crore in FY2022 was set to raise its Tier I capital ratio, improving their gearing levels and potentially ROE. As of Q2 2025, SBFC has kept a healthy ROE of 12.67%, so it seems they know what they’re doing.

2. Room for Growth: A better capital adequacy ratio can provide a cushion for growth, allowing SBFC to expand its business. The company’s new branches and a significant increase in assets under management (AUM) back this up.

3. Financial Stability: A strong capital adequacy ratio means improved financial stability. SBFC’s got this covered with good liquidity and positive cumulative mismatches in its asset-liability management (ALM) statement.

Dark Clouds

1. Asset Quality Issues: While a better capital adequacy ratio can enhance ROE, keeping an eye on asset quality is crucial. A rise in non-performing assets (NPAs) could wash away the benefits of the equity boost. Monitoring the marginal credit profile is essential.

2. Leverage Risks: Raising leverage to boost ROE can introduce issues if mismanaged. Higher leverage can amplify losses if asset quality or operations take a hit. SBFC’s low leverage levels (3.2 times in Q1 FY24) need to be managed carefully.

3. Operational Headaches: Rapid growth can create operational issues, like higher operating expenses or the need for better productivity. SBFC has faced rising operating expenses following branch expansions.

4. Market and Economic Challenges: Keeping ROE high is subject to market conditions. Rising market rates and regulatory changes can influence borrowing costs and overall performance.

The Rising Tide of Costs

Rising costs of funds can put a dent in SBFC’s competitiveness. Here’s what to think about:

Borrowing Costs Rising

With interest rates climbing, costs of funds are going up. For SBFC, expect borrowing costs to rise, which could affect how competitively they price their loans. Their low cost of funds is a major advantage, but increases could erode this edge.

Net Interest Margin Squeeze

Costs of funds can also compress net interest margin (NIM). This is a big deal for banks and NBFCs like SBFC. Rising costs that can’t be passed on to borrowers could hurt their profitability.

Competitive Landscape Dynamics

As costs of funds rise, the competitive landscape can shift. NBFCs might struggle to maintain market share if they can’t offer competitive loan rates. SBFC’s growth is projected to continue, but higher costs could slow this down.

Diversifying Funding Sources and Managing Risks

To mitigate rising costs, financial institutions could look for alternative funding sources or adjust risk management. SBFC’s already diversified its sources of funds to meet capital needs at optimal costs, which gives it an edge in managing increased costs.

Staying Profitable Amidst Rising Costs

How can SBFC maintain profitability without sacrificing customer satisfaction? Here are some strategies they can consider:

Direct Sourcing and Customer Management

SBFC’s direct sourcing model ensures they control customer quality and loan process. This builds customer loyalty. They can enhance this by focusing on local marketing, repeat customers, and walk-ins.

Lean Operations and Tech Use

Investing in tech to boost operations is key. SBFC can keep using automated technology platforms to improve efficiency and manage costs.

Smart Pricing

Balancing pricing competitively is essential. SBFC can leverage its low cost of borrowings to keep prices attractive.

Customer Retention Initiatives

Focusing on customer satisfaction can lead to loyalty. Loyalty programs, personalized communication, and follow-ups to gather feedback can all help retain customers.

Data-Driven Insights

Using data to understand borrower behavior can help SBFC sharpen its loan origination processes.

Cost Efficiency with Quality

They can optimize costs while maintaining service quality through streamlined processes.

Diversifying Funding Options

Continuing to diversify funding sources will help mitigate rising costs. SBFC can explore new sources to ensure it meets capital needs.

Summary

In a nutshell, SBFC Finance’s lending strategy closely mirrors best practices seen in MFIs, emphasizing risk management, customer centricity, geographic reach, tech adoption, and sustainability. By managing risks well and leveraging their strengths, SBFC Finance is poised for sustainable growth and maintaining its competitive edge in finance.

The author does not own or have any interest in the securities discussed in the article.