Small Finance Banks

Making finance possible in unbanked areas

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

Challenges

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.