Many of the existing non-banking finance companies and microfinance institutions (MFIs) can hope to become small finance banks (SFBs) with Reserve Bank of India (RBI) keen to hand out more licences.
RBI said it is considering on-tap licensing for SFBs to expand the financing activity in the priority sector. The regulator said it would review the performance of the payment banks before the licences on this category are put on tap.
Of the ten small finance banks that were given licences, eight have been upgraded as schedule commercial banks, which improves the safety rating on them and helps them to reduce their cost of funds.
On Thursday, Fincare Small Finance Bank became the latest SFB to be migrated to the staus of a schedule commercial bank.
FOR FINANCIAL INCLUSION
RBI said a review of the performance of SFBs reveals that they have achieved their priority sector targets
During the previous round in 2014, 72 applicants had applied for SFB licence, of which 10 were granted one
“The small finance banks have been expanding the priority sector lending activities and the migration to schedule commercial bank status enhances the safety rating on the bank, helping it to raise funds at a lower cost. We have a capital adequacy ratio of 23%, higher than the regulatory prescription of 15%,” said Rajeev Yadav, managing director, Fincare Small Finance Bank.
“The decision to issue draft (guidelines) for “on-tap” licensing of small finance banks will add depth to this sector,” said Rajnish Kumar, chairman, State Bank of India.
“During the previous round in 2014, 72 applicants had applied for SFB licence, of which 10 were granted one in 2015, indicating preference for a SFB model. While we await for the draft guidelines to be made available over the next two months, the move towards on-tap licence for SFBs could provide opportunity to existing MFIs (microfinance institutions) and NBFCs to revisit their business plans,” said Naresh Takkar, managing director and group CEO, Icra.
“A review of the performance of small finance banks reveals that they have achieved their priority sector targets and thus attained their mandate for furthering financial inclusion,” RBI said in its policy document. “Hence, there is a case for more players to be included to enhance access to banking facilities to the small borrowers and to encourage competition. It is, therefore, proposed to issue the draft guidelines for ‘on tap’ licensing of small finance banks by the end of August 2019,” RBI added.
It has also been decided that more time is needed to review the performance of payments banks before considering the licensing of this category of banks to be put ‘on tap’. According to an analysis done by Icra, SFBs have reported annualised growth of 33% in assets under management to Rs 64,325 crore as on December 31, 2018. This growth in the share of non-callable deposits, coupled with the inherent benefit of shorter-tenor assets, has also resulted in a favourable asset-liability maturity profile for SFBs. Further, increased funding from refinance institutions has helped SFBs in retiring their maturing liabilities.