Unbanked at centre of RBI’s new licensing regime
It was the Committee on Financial Sector Reforms, chaired by Raghuram Rajan, which in 2009 came up with the idea of creating small finance banks in the private sector that could address the needs of both low-income households and also small businesses. It has taken six years for the idea to take shape but the start is promising; the 10 players, mostly microfinance institutions, that have won in-principle approvals to turn into small banks, are already catering for such consumers and should be able to keep up the good work now that they can also access deposits. The fact that most of those selected are very well capitalised with an equity base much above the required minimum of Rs 100 crore would have reassured the regulator and probably made them more eligible candidates. What must also have gone in their favour is the negligible level of bad loans in their portfolios, an indication of how strong both the appraisal and recovery mechanisms are. After all, these lenders have been working with the poorest of the poor, including small farmers and migrant labourers, and if they are able to grow their businesses without losing capital, their systems must be efficient.
Going by the indications given by some players of the number of customers they have, the 10 lenders together appear to be catering for a universe of an estimated 10-12 million people. That then leaves them with enormous scope to expand their operations since only an estimated 500 million Indians have active bank accounts with another 150-200 million using no-frills accounts. Moreover, since they will not be constrained to work in contiguous areas, small finance banks can diversify their risks across geographies, necessary given the lending is targeted at the agricultural and micro enterprises sectors. Indeed, the strength of the business models of many of the winners lies in that they operate across four or five states or even across the country. In the process of morphing into banks, the rules of the game will change, but there is little they should not be able to cope with. For instance, making sure 75% of the loan portfolio is focussed on the priority sector should not be a challenge since that is where most of the money is going anyway. Moreover, since the ticket sizes for most players range between R12,000 and R18,000, except in some instances where they are in lakhs, making sure that at least 50% of the adjusted net bank credit comprises loans of up to Rs 25 lakh, should not be difficult. Even if the ticket sizes increase fivefold or more over the years they would be far below the cap.
With a whole set of new lenders out there—first payments banks and now small finance banks—small consumers and businesses will now be taken care of. The central bank has said it will watch the performance of the initial lot before putting licences on tap. Going by their track record, there should be little cause for worry.