A clutch of 10 small lenders — mainly microfinance institutions — from across the country on Wednesday won in-principle approvals to set up small finance banks ostensibly for their familiarity with rural and small-town India and their strong track record of servicing customers who are all very small borrowers.
Going by the Reserve Bank of India’s (RBI) choice of licensees, it is apparent the central bank’s objective in selecting these lenders is to further financial inclusion even as it adds yet another dimension to differentiated banking.
Most winners are headquartered in smaller cities including Jaipur, Varanasi, Guwahati, Jalandhar and Ahmedabad, with a couple located in Bengaluru, and have a presence in at least three states. Suryoday Micro Finance, for example, operates in Maharashtra, Tamil Nadu, Odisha and Karnataka but some others have a near pan-India presence.
While small finance banks can theoretically become universal banks, their current scale of operations — loan books as small as Rs 1,000 crore — suggests it could take a while. The good news: Almost all are well capitalised with equity capital much above the required R100 crore. The Bengaluru-based Janalakshmi Financial Services, for one, has Rs 1,000 crore of capital.
Small banks must lend 75% of their adjusted net bank credit to the priority sector but that already is the case for these players. The average ticket size for Ujjivan Financial Services, for instance, is Rs 20,000, while for a couple of others it is even smaller at Rs 12,000.
Consequently, the size of asset books is also minuscule compared with those of large scheduled commercial banks starting at around Rs 1,000 crore and going up to Rs 4,000 crore or thereabouts.
Ujjivan has a loan portfolio of Rs 3,300 crore and operates across 24 states.
Lenders said turning into a bank would enable them to offer more services to customers. R Bhaskar Babu, co-founder, Suryoday, observed the idea was not just to garner deposits but to build a deeper relationship with customers by offering other products.
RBI rules say at least 50% of the portfolio must constitute loans of up to Rs 25 lakh, a criterion that should not be difficult to meet. Only a few players offer loans to micro enterprises that run into lakhs. Radhakrishnan VS, MD&CEO, Janalakshmi Financial, said that all the lending was targeted at the priority sector.
Small banks can raise deposits from customers and can offer a suite of financial products and could in some ways compete with payments banks that are also allowed to mop up deposits. Samit Ghosh, MD & CEO of Ujjivan Financial, which has virtually no non-performing assets and a capital of Rs 700 crore, told a leading television channel that customers would prefer to save with his bank given how many of them were being duped by chit funds and similar schemes. However, Ghosh pointed out it would be a while before the bank’s cost of funds fell meaningfully.
Small banks must maintain the statutory liquidity ratio and the cash reserve ratio much like universal banks.