Small Finance Bank Rise: Its Impact On The Economy
- Business Finance
Andrey Ivanov- 0
- 8 minutes read
There is a significant small finance bank rise in India. And today this is the topic that we will be dealing with. Let us begin our article with a case study for a better analysis.
The Case Study
When Govind Singh left his 20 year old career in 2009 as a bank employee he was ready to take the risk and follow his passion. At the age of 43, he established a microfinance entity known as Shree Pathrakali Finance. It is primarily lent to women. Functioning under the Utkarsh Brand, the target of the firm was the small business owners of Varanasi with micro loans.
Just after 2 decades of its establishment, Mr. Singh is preparing for the launch of an IPO of 1,350 crore INR. The Utkarsh SFB is among the 5 small finance banks that are predicted to launch an IPO in the upcoming months. The other 4 SFB include Jana Small Finance Bank Ltd, previously known as Janalakshmi Financial Services Ltd, ( ₹ 700 crores), ESAF Small Finance Bank ( ₹1,000 crores), Capital Small Finance Bank Ltd ( ₹1,000 crores), and Fincare Small Finance Bank ( ₹1,330 crores). So there is a prominent small finance bank rise that has been witnessed since the last decade.
These IPOs are launched during a period when the outer environment is not very conducive for these bank’s listings. With the business of lending turning out to be severely disrupted by the advent of Covid-19, these small finance banks are trying really hard to get things back on track once again. These banks in some way have been victims of their own successes. As per RBI (Reserve Bank of India) which initiated a new category known as “small banks” in the financial space of India just before half a decade, it is required for the small finance banks to list on the stock exchange within 3 years of getting a net value of 500 crore INR. And the small finance banks are in a hurry to rapidly grow.
The Idea Of Small Finance Banks And The RBI
The concept behind the small finance banks can be seen back in 2013 when a RBI’s internal group recommended that similar to micro finance institutions, banks should start to see the poor as a profitable option as well. On the basis of the observation, the panel suggested the launch of a new well governed, private, deposit accepting SFBs that can function in a small area.
However, the proposal soon turned into reality when the governor of RBI was Raghuram Rajan and the term “small finance” was coined which indicated not the bank’s size but the loan’s size or the economic status of the borrower.
In a nation where innovation in Banking is a dime a dozen that ranges from neo banks to payment banks, to e-wallets, the universe of 11 small finance banks is a ray of hope, an innovation that has worked to some extent. People have witnessed small finance banks rise in recent times.
Even though India’s share of bank accounts has increased swiftly over the previous decade, most of these accounts are hardly used. Most Indians still maintain distance from formal financial organizations. According to the governor of RBI, R. Gandhi,
“It’s early to say if the concept of SFBs is a success story. So far, they have done reasonably well. We need to see how they are able to manage one full business cycle."
Even though it is still early days, there are also several detractors who question the performance of SFBs, mainly on the financial inclusion plank. Most of the new small banks function in urban and semi-urban areas and a large part of their deposit portfolio contains large borrowers. Naturally, according to experts, these banks have already moved away from “small finance” in their desire for quick growth. According to an industry expert,
“This is a wrong model for financial inclusion. When you have given (SFBs) the ability to give a loan of ₹25 lakh, do you think they will (give) a ₹40,000 loan? This is an appropriate design for MSME finance. They are only catering to the missing middle-income market.”
Conclusion
While the RBI is getting ready to issue new licenses, few SFBs continue to see the license as a mere plank to get what is still an elusive tag in the Indian perspective, which is a “regular commercial bank”. But doesn’t this break the very aim of creating a designing SFB category and enable more small finance bank rise? According to the founder of Ujjivan Small Finance Bank,
“SFBs want to become like HDFC Bank. A lot of regulations are liberal for universal banks. Becoming a universal bank is less capital intensive. That’s why most of them want to become a universal bank."
