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Small Finance Bank: What lies ahead

The landscape of the Indian financial system has changed in the last few months. Never before in its history has the Reserve Bank of India opened the gates for over 20 new entrants into the banking system at a go.

After granting licences to two new Universal Banks and 11 Payments Banks, the RBI on Wednesday granted “in-principle” approval to 10 Small Finance Banks or SFBs.

While each set has its own opportunities, CNBC-TV18 spoke to some of the winners of Small Finance Bank licences to understand the challenges they now face.

Post the initial euphoria of being granted a small bank status, the licencees are now waking up to the mammoth task that lies ahead in the coming 18 months.

Eight out of ten SFBs are micro finance institutions (MFIs). Most of them have private equity funding, which in turn means large foreign shareholding.

Some like Ujjivan Financial Services have foreign ownership which is as high as 90 percent, much above the stipulated RBI norm of 74 percent.

Bringing down the shareholding will be a tough ask, given that it will have to be replaced with domestic capital.

Secondly, the MFIs or NBFCs or LABs will have to rebalance their books completely to transition into a bank.

They will have to raise enough capital to meet the regulator’s requirement on both the cash reserve ratio (CRR) and Statutory liquidity ratio (SLR) front in the coming 18 months to be able to secure the final nod from the RBI. Securing the right human capital will also be a challenge.

SFBs will require a new set of skills to build their risk models and treasury books, something they did not have to face previously.

As MFIs, some players grew at almost 100 percent annually, but as they transition into a bank, they will have to face slow growth in the initial years as they grow their deposit base.

As MFIs or non-banking financial companies (NBFCs), they could rely on borrowing from other banks or PE players to grow, but they will have to rely on depositors now.

Players like Suryoday Micro Finance, which is based in Navi Mumbai, say they have 20 percent branches in rural unbanked areas. They will have to quickly expand their branch network in these unbanked areas. RBI’s guidelines say a SFB must have at least 25 percent branches in such areas.

Given their expertise and operation as MFIs, meeting the 75 percent priority sector lending may not prove to be a challenge for these SFBs, nor will ensuring that half the book is to borrowers with less than Rs. 25 lakh loans be.

In fact, experts say that small banks could make a business out of selling their excess priority sector lending (PSL) portfolio to large banks.

There is no denying that these 10 new licencees will face a huge challenge as they transition into a small bank, but in a country where the vast majority is under-served or un-served financially, there is also an equally large opportunity.

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