Small Finance Banks

RBI Governor Raghuram Rajan on Thursday said licences for Small Finance Banks would be announced next month. RBI had received 72 applications for small finance banks and 41 applications for payments banks. Small finance banks will be similar to existing commercial lenders and will undertake basic banking activities of accepting deposits and lending to unserved and under-served sections.

With a minimum capital of Rs 100 crore, they will have to direct 75 per cent of their credit to the priority sector - primarily agriculture, small industry, small business, micro credit, education and housing. The sector's ambit may be widened to include agri-infrastructure, agri-processing, health care, sanitation, drinking water and renewable energy.

The central bank has also stipulated that 50 per cent of the small banks' credit portfolio must comprise loans of Rs 25 lakh or less, so that small borrowers become a priority. A report in www.firstpost.com says that Small Finance Banks come with obligations of rural branch presence, priority lending targets and minimum paid-up capital, but may take deposits and give loans, whereas Payment Banks, which aren’t subject to these conditions, are allowed mainly to participate in payment transactions.

Small Finance Banks, which may issue loans subject to a ceiling of Rs 2.5 million, might want to focus on niche areas, such as personal or small business lending, initially. They must augment the basic offerings with a value-adding advisory component, to make productive use of their investment in branch infrastructure. Successful models of peer banks in other countries, such as Japan’s Jibun Bank or Slovakia & Czech Republic’s Zuno Bank, could be followed.

Business Today in a report observed that there have been small banks in India for a long time, but their impact has been limited. But their share of deposits and credit advances in the overall banking system is less than five per cent. Urban cooperative banks (UCBs) have an even smaller share of 3.5 per cent, while the regional rural banks' (RRBs) share is three per cent. Moreover, most of them have built their businesses by lending to wealthy traders and not to the sections Rajan has in mind for the new small banks.