‘A rethink on priority sector norms for SFBS can be helpful’

Nearly a decade ago, the Reserve Bank of India (RBI) licensed 10 small finance banks (SFBS) to bolster financial inclusion. The Report on Trend and Progress of Banking in India (FY23) notes that some microfinance institutions among SFBS earlier retained their business models. Consequently, the share of unsecured lending in their portfolios, especially to microfinance and joint liability group borrowers, is high. Lack of asset diversification is also often coupled with geographical concentration, implying significant risk. A comprehensive review of the regulatory capital framework for SFBS is under consideration. A few SFBS also want a relook at the license condition that 75 per cent of their advances be to the priority sector, and more clarity towards a universal banking licence. UMA SHANKAR PALIWAL, chief executive officer of the Association of Small Finance Banks of India (and former executive director, RBI), spoke with Raghu Mohan in a video interview. Edited excerpts:

At the outset, your views on SFBS’ journey so far…

The RBI (Reserve Bank of India) granted licences in September 2015 to 10 SFBS. The requirement and expectation, including the objective of the RBI, were that it should lead to greater financial inclusion and also serve the unbanked areas. So, to that extent, yes, all the 10 SFBS that have been in existence have been doing a good job, and in addition to them, two more have joined in the past two years with one converting from a cooperative bank, which the RBI has also encouraged. So, it has been a great journey.

Is the SFB model sustainable in its current form?

Yes, categorically. One, the licensing conditions said 75 per cent of the advances have to go to the priority sector, and all SFBS have been doing it very successfully. Two, of total advances, 50 per cent have to be below ~25 lakh — a condition that leads to furthering financial inclusion. The very fact that 25 per cent of the branches have to be opened in unbanked areas has also been met. I would also like to reiterate that the conditions in the market and the operations of SFBS in meeting the requirements and showcasing them – in terms of the licence conditions for which they were set up – have been established in the past seven years.

But do you feel there is a need for a rethink on the SFB priority sector norm to align with that of commercial banks at 42 per cent of book?

Well, the licensing conditions as we all know were different. The regulator can think of having a glide path that may not be touching 42 per cent because then the gap between the two and the distinction between an SFB and a universal bank would disappear, at least on this front.

The stock market performance of SFBS appears to indicate that further supply of capital is going to be an issue.

The majority of the SFBS are listed; I am talking of the original 10. What we have seen is an overwhelming response in the IPO (initial public offering) participation by the public as well as investors (institutional), and that proves that there is appetite for the sector. And this is also further complemented by the fact that for on-tap licences, 10 applications have been received, some of which were under active consideration and some of them continue to be so.

Do you think there is a need for further clarity on SFBS path towards universal bank licences?

The guidelines of 2015 indicated that after the successful completion of five years and subject to the conditions that have to be met in terms of the networth and capital for applying for a universal bank licence, SFBS that are fulfilling the requirement are eligible. Now, it is left to SFBS to take a call as and when they feel like whether it would be an option for them. And yes, in case there is clarity required on the existing guidelines the SFBS, including the Association of SFBS can always engage. And we are willing to provide the inputs to the regulator to ensure that there is clarity in case some need is felt on part of the SFBS for doing so.