Big small steps towards financial inclusion

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Mumbai | Updated: September 17, 2015 1:02:01 AM

Sticking to its theme of financial inclusion and making credit available for small borrowers, the Reserve Bank of India granted in-principle licences...

Sticking to its theme of financial inclusion and making credit available for small borrowers, the Reserve Bank of India granted in-principle licences to set up small finance banks to 10 applicants, all microfinance companies. In fact, even among the various microfinance applicants, the central bank seems to have left out large players and chosen to go with those with more modest sizes.

Among the 10 applicants that got the licence were Ujjivan Financial Services, Equitas Holdings, Janalakshmi Financial Services, Suryoday Micro Finance and Utkarsh Micro Finance. Ujjivan has an outstanding loan portfolio of Rs 3,300 crore and operates in 24 states and Union Territories currently. Its net profit in 2013-14 was Rs 55 crore.

Utkarsh Microfinance has a loan book of Rs 920 crore and has a 7.5 lakh customer base.

In total, there were 72 applicants ranging from individuals, microfinance companies, housing finance companies and even non-financial companies. None of the 12 individual applicants got a licence approval and even big lenders such as Dewan Housing Finance, SKS Microfinance and Repco Microfinance lost out.


Small finance banks were deemed to be a stepping stone towards conversion to full service banks eventually.

RBI governor Raghuram Rajan had also said the central bank expects some of the small finance bank licencees to scale up eventually and opt to be universal banks. In fact, Janalakshmi Financial Services will opt for a non-operating financial holding company structure so that it can eventually turn into a universal bank with ease.

However, that the licences have been given to small players indicates the central bank wants the spirit of financial inclusion to be preserved and these new players to concentrate on small borrowers.

Said VS Radhakrishnan, MD & CEO, Janalakshmi Financial Services: “We will ensure that we create the right structure to comply with all the conditions laid down by RBI and we are confident we will be able to do it. Our intention is to convert Janalakshmi into a bank and create a NOFHC structure that RBI had suggested under the universal bank category.” He added: “So, we will create a promoter company and Janalakshi will become the bank.

We have the capital that we need and have to finalise the structure to comply with the requirements. We will perhaps need more capital for growth and, given that, we hope to have both our existing investors and new investors who’d be happy with the progress and participate in it.”

Guidelines set out by the RBI in November last year mandate small finance banks to lend 75% of their advances to the priority sector and not less than half of their loan book should be of loans of up to Rs 25 lakh. Microfinance companies which have got licences said that the norms on lending would be easily met and in fact give scope to expand their operations. “Our average loan size is Rs 12,000, so we have immense scope to lend higher ticket size,” said Govind Singh, founder and MD&CEO of Utkarsh Micro Finance.

Small finance banks can also distribute simple third-party financial products, such as mutual funds and insurance schemes, but cannot be business correspondents of other banks, as per the guidelines.

Also, microfinance lenders said meeting the minimum capital requirement of Rs 100 crore to set up a small finance bank would be easy. “We have over Rs 700 crore in capital and we have been in operation for 10 years and capital is not an issue,” said Samit Ghosh, managing director and chief executive officer at Ujjivan Financial Services.

Further, the central bank mandates that promoter holding should be minimum 40% of equity capital, but must be brought down to 30% in ten years time. The foreign shareholding is capped at 74% of paid-up capital. Suryoday Micro Finance will convert itself into a bank while making the necessary changes in shareholding to comply with the norms, said Bhaskar Babu, co-founder of the company.

According to Ghosh, Ujjivan will have to convert its ownership as it is pre-dominantly foreign-owned. “We have to convert our ownership structure to a domestic entity, which will be a big challenge. At the same time, we have to build a business model that has to be unique, keeping in mind the customer base and learning from other financial institutions across the world who have served this customer base using technology,” said Ghosh.

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