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The Reserve Bank of India has warned small finance banks (SFBs) against hidden and emerging risks that could jeopardise their long-term success.
“During periods of rapid growth, the focus on increasing market share, launching new products, and acquiring customers can lead to a neglect of essential risk management practices. Growth is important for the success of Small Finance Banks. However, it must not come by overlooking operational controls,” Swaminathan J, Deputy Governor, RBI, said at the Conference of Directors of Small Finance Banks in Bengaluru on September 27. The speech was uploaded on RBI website on Monday.
SFBs have demonstrated strong growth since their inception, now accounting for 1.18 per cent of total banking assets (as of March 2024). This is a substantial rise from 0.44 per cent in March 2018. The deposit base has grown at a 32 per cent compounded annual growth rate (CAGR) over the last five years whereas net advances recorded a CAGR of 26 per cent. “While the business growth in Small Finance Banks is indeed impressive, it is imperative that Boards remain vigilant for hidden and emerging risks that could jeopardise their long-term success,” said Swaminathan.
Attrition rate
Another significant area of concern for operational risk is the high attrition rate among staff in Small Finance Banks. While the branch network and employee headcounts are expanding, the sector faces a high attrition rate of nearly 40 per cent, particularly among frontline staff and junior management.
“Such elevated turnover, though mostly at the entry and junior management levels, poses substantial operational risks, as it can lead to a loss of institutional knowledge, disruption in service delivery, and increased training costs for new hires. To mitigate these risks, Board-level efforts are essential to focus on employee retention strategies at all levels. Further, the absence of succession planning for critical managerial positions is a common issue across SFBs, which requires immediate attention from Boards to ensure a smooth transition of leadership and maintain operational effectiveness,” the deputy governor said.
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