MUMBAI: The Reserve Bank of India on Wednesday shortlisted 10 micro lenders to set up small banks to advance loans primarily to the unbanked, small businesses and farmers, micro and small industries and unorganized sector entities which do not have access to finance from the larger banks. Of the 10 entities granted in-principle approval to transform into banks, eight are microfinance providers, one a local area bank and one a non-banking finance company.
Small finance banks are similar to regular commercial banks except that their scale of services will be much smaller. These new type of banks should generate at least 75% of their business from the priority sector (largely agriculture) and mainly from areas where large banks are not present. Besides, 50% of their loans should be of ticket sizes under Rs 25 lakh. Licences for payments banks, which were issued recently on the other hand, are those specialized small banks which can only receive deposits and offer remittance services, but cannot give loans. The payments banks are also not allowed to hold a balance of more than Rs 1 lakh per customer in their bank accounts.
Like payments banks, the minimum paid-up equity for small finance banks is also fixed at Rs 100 crore. For small banks, promoters’ initial contribution should be at least 40%, which could be brought down to 26% over the next 12 years, RBI guidelines said.One common thread running across the list of the 10 successful applicants of small banks is that all of them have managed to extend credit to small borrowers which no bank has been able to reach. The sole NBFC in the list, AU Financiers, is a Jaipur-based company that extends credit to small and medium enterprises. Janalakshmi, Ujjivan and Suryoday are urban microfinance companies operating in Bengaluru, Navi Mumbai and Mumbai. Equitas Microfinance, besides extending loans for income generation, provides home and auto loans. RGVN, on the other hand, focuses on the north-eastern states while Disha Microfinance, which has its operations in Gujarat, focuses on women.
“The detailed scrutiny involved assessment of financial soundness, proposed business plan, fit and proper status based on due diligence reports received from the regulators, investigative agencies, banks, etc. An important factor was proposed reach into unbanked areas and underserved sections of the population,” the RBI said in a statement.
RBI’s decision to grant licences to only 10 players would have resulted in a lot of disappointment as there were as many as 72 applicants, including a host of professionals and finance companies. A couple of prominent names that did not make it include UAE Exchange, SKS Microfinance and Vaya Finserv, floated by Vikram Akula after he exited SKS.
Several of the MFIs are promoted by former banking professionals. Both Ramesh Ramanathan of Janalakshmi and Samit Ghosh of Ujjivan are former Citibankers. Govind Singh of Utkarsh was with the State Bank of Patiala, ICICI Bank and Axis Bank, while RGVN was promoted by S M Palia, a former IDBI official. Some of these companies are also backed by top names from the financial space like IFC, World Bank, Morgan Stanley, TPG, HDFC and Tata Capital.
According to RBI’s mandate for these entities, they have to be operational as a bank in the next 18 months. So the task at hand for the winners is challenging. “It’s a unique opportunity for us in the financial inclusion space. But it also poses a very serious challenge in the next three years,” said Samit Ghosh, MD, Ujjivan. “We have to leverage the digital space to meet those challenges,” he said.
RBI rules stipulate that small finance banks will primarily undertake basic banking activities like accepting deposits and lend to “unserved and underserved sections including small businessunits, small and marginal farmers, micro and small industries and unorganized sector entities”.
At least 50% of loan portfolio of these banks should constitute loans and advances of up to Rs 25 lakh. However, there are no restrictions relating to areas of operation for these banks, RBI guidelines said.