Small Fi­nance Banks

Mak­ing fi­nance pos­si­ble in un­banked ar­eas

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Mak­ing fi­nance pos­si­ble in un­banked ar­eas

‘Fi­nan­cial in­clu­sion’, ‘ bank ac­counts for all’… Th­ese phrases have been part of the lex­i­con of many suc­ces­sive gov­ern­ments in In­dia. In 2014, the Prime Min­is­ter’s Of­fice de­clared that its ob­jec­tive was to en­sure that ev­ery In­dian had a bank ac­count, en­abling them to avail of sim­ple bank­ing ser­vices. One thought be­hind the idea was to en­sure that the pub­lic could avail of the di­rect ben­e­fits of sub­si­dies and other schemes of the govern­ment. For suc­cess­fully im­ple­ment­ing the idea, one of the ma­jor ini­tia­tives launched by the govern­ment was the so-called ‘ pay­ment bank’. While pay­ment banks have suc­ceeded to an ex­tent in pro­vid­ing ba­sic bank­ing ser­vices, they have some lim­i­ta­tions and can­not get into ad­vanced ser­vices like grant­ing ad­vances or fi­nanc­ing busi­nesses. In or­der to make avail­able such ser­vices in ru­ral and semi-ur­ban ar­eas, the Re­serve Bank of In­dia (RBI) has granted in-prin­ci­ple li­censes to ten en­ti­ties to open ‘small fi­nance banks’ (SFBs). Th­ese SFBs’ larger ob­jec­tive is to strengthen small-scale busi­nesses at the grass­roots by help­ing en­trepreneurs, small and marginal farm­ers, and mi­cro and small in­dus­tries. Hence, ba­sic bank­ing con­sumers in the re­mote ar­eas are likely to have ac­cess to ad­vanced bank­ing ser­vices. Here we have col­lated the rel­e­vant in­for­ma­tion for you to know th­ese SFBs bet­ter.

The Ob­jec­tive

As per RBI, small fi­nance banks will en­sure fi­nan­cial in­clu­sion of the pub­lic as they will en­able – (i) pro­vi­sion of sav­ings ve­hi­cles (ii) sup­ply of credit to small busi­ness units

(iii) lend­ing of fi­nance to small and marginal farm­ers (iv) ex­tend­ing loans and ad­vances to mi­cro and small in­dus­tries and other un­or­gan­ised-sec­tor en­ti­ties, through high-tech­nol­ogy and low-cost op­er­a­tions

Scope of Ac­tiv­i­ties

As per RBI, small fi­nance banks will pri­mar­ily un­der­take ba­sic bank­ing ac­tiv­i­ties of ac­cep­tance of de­posits and lend­ing to un-served and un­der-served sec­tions in­clud­ing small busi­ness units, small and marginal farm­ers, mi­cro and small in­dus­tries, and un­or­gan­ised-sec­tor en­ti­ties. In­ter­est­ingly, the RBI has also stated that there will be no re­stric­tion on the area of op­er­a­tions of small fi­nance banks.

As for the credit lim­its, SFBs will lend as much as 75 per cent of the needed fi­nance for pri­or­ity sec­tors in­clud­ing agri­cul­ture, small en­ter­prises, and low­in­come earn­ers. Small fi­nance banks will also have to en­sure that 50 per cent of their loan port­fo­lio is con­sti­tuted of ad­vances of up to Rs 25 lakh.

Pub­lic’s Ex­pec­ta­tions

In gen­eral, apart from the fun­da­men­tal fi­nan­cial ser­vices, the pub­lic de­mands a bit more from a bank. Here, we have col­lated a few ex­pec­ta­tions on con­sumers’ be­half:

Build re­la­tion­ships rather than ac­count num­bers

Em­pha­sis should be on cus­tomer ser­vice

Do a com­pre­hen­sive due dili­gence on the bor­rower to avoid con­flicts

Build ro­bust credit-wor­thy port­fo­lios

Foucs, work, spend on fi­nan­cial education and coun­selling

Re­mem­ber that fi­nan­cial in­clu­sion is the pri­mary goal, not fi­nance gen­er­a­tion


While the ob­jec­tive and the mo­tive of the SFBs seem promis­ing, some of the ma­jor chal­lenges be­fore them are to: i) cre­ate a sus­tain­able busi­ness model, ii) gain trust of the de­pos­i­tors, and iii) ad­here to the pru­den­tial norms like main­tain­ing a cash re­serve ra­tio (CRR), statu­tory liq­uid­ity ra­tio (SLR), and in­vest­ing in govern­ment se­cu­ri­ties.

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