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  1. Small finance banks are the profitable way to financial inclusion

Small finance banks are the profitable way to financial inclusion

On Wednesday, the Reserve Bank of India (RBI) rewarded 10 of them, mostly microfinance institutions, with licences for converting themselves into small finance banks, in the process adding another dimension to differentiated banking.

By: | New Delhi | Updated: September 17, 2015 8:03 PM
Built loan by loan, painstakingly over 14 long years, Chandra Shekhar Ghosh’s Bandhan Bank has come this far sans swanky offices, high-flying executives or ESOPs. (Photo: Kevin Dsouza)

Built loan by loan, painstakingly over 14 long years, Chandra Shekhar Ghosh’s Bandhan Bank has come this far sans swanky offices, high-flying executives or ESOPs. (Photo: Kevin Dsouza)

Shobhana SubramanianBandhan’s brand campaign on television is truly refreshing. Steering clear of the noise – not for it the loud canvassing by film stars or bragging about the latest app – all the advertisement does is have a few children talking of how the affluent can help the underprivileged. An entirely different perspective on money transfers! As modest as the bank’s beginnings is the catchline – aapka bhala, sabki bhalai. Built loan by loan, painstakingly over 14 long years, Chandra Shekhar Ghosh’s Bandhan Bank has come this far sans swanky offices, high-flying executives or ESOPs.

The good news is that is that there are many other small lenders across the country, especially in rural areas, that cater to the needs of small borrowers. On Wednesday, the Reserve Bank of India (RBI) rewarded 10 of them, mostly microfinance institutions, with licences for converting themselves into small finance banks, in the process adding another dimension to differentiated banking. Just a month back, the central bank had allowed a motley set of 11 players – telcos, banking correspondents, IT firms, the postal department and a depository – to set up payments banks. Both payments banks and small finance banks will allow those that aren’t able to access the formal banking system to use banking facilities; this is financial inclusion the profitable way and it’s a shame it didn’t happen earlier.

Although payments banks can collect deposits its unlikely they will be able to wean away too many customers from banks since they cannot lend; the customer franchise, therefore, it would appear will by and large remain with the banks. Indeed, lenders like a State Bank of India and a Kotak Mahindra Bank have partnered large telecom players to set up payments banks with the precise intention of being able to lend to the customers at some point. But given how mobile transactions are going to become increasingly popular – one estimate says they will account for 10% of payments by 2022 from 0.1% at present – universal banks must build strong digital platforms. Else they run the risk of being left behind.

The new small finance banks will be in a space of their own; unlike in their MFI avatars, they can now mop up deposits and while they will need to comply with a whole set of new rules, they should remain profitable. Given how most of them have virtually no NPAs on their books it would be safe to assume they will not fritter away any of the advantages they now have. That’s important because any mishaps will only make the central bank cautious about putting out these licences on tap. In a country where close to 60% of the population doesn’t have access to formal lending and are at the mercy of the moneylender small banks can be life-savers. Going by the numbers put out by some of the lenders the universe of customers they’re catering to is around 10-12 million people. That then leaves another 600 million Indians who need banking services. Hopefully, the story of Ghosh and all the other entrepreneurs who started small-scale lending institutions and have become a bank, even if it’s a small one, will inspire a few more men and women to join them.

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