February 2019
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Disruptive Innovation and Inclusive Growth

Small-businessBy R. Gandhi, Deputy Governor at FIBAC
Small Finance Banks are going to be game changers. Let me explain our thought process. First, whom are we targeting to form the Small Finance Banks? The Guidelines for Licensing Small Finance Banks indicated that resident individuals / professionals with 10 years of experience in banking and finance and Companies and Societies owned and controlled by residents will be eligible as promoters to set up Small Finance Banks.

 The Guidelines also said that existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and LABs that are owned and controlled by residents can also opt for conversion into small finance banks. We received 72 applications and as you would have noted, 41 among them are existing NBFCs, MFIs and LABs and 12 are individuals / professionals. The MFI-NBFCs registered with us are 65 and their resources are limited to their own equity, borrowing from banks and market borrowings.

They are not permitted to access low cost or why, even any deposit. Despite such constraints, they have serviced 25.5 million accounts / customers and had a credit portfolio of Rs 277.34 billion as at end March 2015. Likewise, the NBFCs also typically depend on their own equity, bank funding and market borrowings for their resources. Out of the 11,842 registered NBFCs as at end March 2015, as many as 11,622 cannot accept deposits. The credit portfolio of these NBFCs stood at Rs 11,169.24 billion as at the end of March 2015. The LABS, as of now, cannot expand their services beyond the few districts permitted for them. Their credit portfolio amounted to Rs 13.18 billion as at the end of March 2015. These entities are in the financial inclusion arena – MFIs by definition and the NBFCs and LABs by serving the unserved or underserved segments of population and economy.

If these MFIs, NBFCs and LABs could achieve this level of penetration with such constraints as they operate today, if such established entities would become Small Finance Banks, with access to low cost deposits, all-India operations and the discipline of banks can cater to much wider unserved, underserved and excluded segments. With their USP of service at door step, flexible times, cash-flow based credit assessment, minimum documentation, continuous monitoring, hand-held manual ATMs, these Small Finance Banks can totally alter the face and definition of banking. Post their success, I am sure, text books will redefine the concept of banking, reflecting these entities functioning, than the brick and mortar universal banks.

(Courtesy: RBI.org.in)