Ad Here  
Perhaps small is more beautiful than big! Banking overhauling or reorganisation? Anytime banking to anywhere banking Nothing much can happen…. Banking on Risk Governance in Reverse Gear? Mega merger is on Just 660 days! Target over-ambitious... A development bank for BRICS Needed a Banking Atlas Too big to fail and too small to sail Lacklustre credit expansion Ernakulam excels... Emerging crisis Monetary policy continues to adopt dis-inflationary path A bank for women, by women How ‘secure’ are the secured loans? Hesitancy in announcing year-end results Small is ‘more’ beautiful Stage set for Indian ‘avatar’ of foreign banks United India Insurance - Rs 110 crore losses have been claimed till now due to floods in Tamil Nadu All that glitters is not gold... Smart banking in smart cities From lazy banking to easy banking How okay are new banks? Capital base of regional rural banks raised Aadhaar, niraadhaar and banking What is the priority – mergers or NPA reduction? New bank licences, at last... Bottomlines shrink, bad loans rise... Fund healthcare clinics in villages... Managing NPAs... Cut in repo rate – lower than expected Drop in SLR- sparing lendable resources A new development bank rising in the east… One down in private sector Financial inclusion vs unclaimed deposits Targets continue to be ad hoc Good, bad and ugly The collaboration suite of cyber criminals Indian customers are tech savvy Payment banks have arrived Small finance banks offer high interest rates Holy or unholy? Another route for achieving financial inclusion Growing gainfully Thirty more cities seek to become SMART Reaching out: is it slowing down? Two banks: their jubilees and performances Big bank merger, bigger expectations Bank deposits account for 46.3 per cent of household savings Insatiable appetite for credit Merger mania haunts banks Reaching the Unreached… Drastic decline in asset quality Small finance payment banks... LVB- A supermarket of financial services Well-lived... Grows Bigger Cautious and considerate Who is the real beneficiary? Greet Lakshmi the banking robot It’s a war on black money, support it. Cradle of banks to a smart city... Rationalised Why priority status? Ferrying digital banking to Lakshadweep New capitals of Migrant banks Banking in Telangana The paradox: clamour for the Goliath and David Growing volume of stressed assets… Why any time money?
The paradox: clamour for the Goliath and David
Indian economy is known for its diversities. And now, the banking sector is also entering this forum.

The clamour for ‘big banks’ is growing; no doubt, but the RBI also received 72 applications for small finance banks. These included many applications from the microfinance sector. Seven small banks were set up out of 10 licences issued. 

Capital Small Finance Bank Ltd, Jalandhar, was the first to transform from a local bank into a small finance bank. The bank commenced operations with 47 branches and added 14 more. 

Utkarsh Small Finance Bank Ltd commenced operations from Varanasi, with five branches. Currently, it has ten branches and 350 small finance offices. They offer 1-1.25 per cent higher interest rates on deposits compared to other banks. 

Suryoday Small Finance Bank Ltd started operations from Navi Mumbai this year and has a network of 27 branches. It took eight years for the microfinance company to transform into a small finance bank. 

Ujjivan Small Finance Bank Ltd set up in Bengaluru, commenced its operations with five pilot branches. Soon it strengthened its presence by opening six new branches. It plans to expand its presence across 24 states in a phased manner.

ESAF Small Finance Bank Ltd began with three branches in Chennai. It was established in 1992 ‘as a response to the social and economic needs of the people.’ This bank proclaims ‘to be standing for sustainable, holistic transformation of the poor.’

Equitas Small Finance Bank Ltd has three branches in Chennai. It was formed by amalgamation of Equitas Micro Finance Limited (EMFL) and Equitas Housing Finance Limited (EHFL)

AU Small Finance Bank Ltd formed by conversion of Au Financiers India, a non-banking finance company into a small finance bank in Chennai.

The other three proposed small finance banks, waiting in the wings, are Janalakshmi Small Finance Bank (Bengaluru), RGVN Microfinance (Guwahati) and Disha Microfinance (Ahmedabad).


Problems and prospects

Small finance banks offer higher interest rates on deposits. However, 75 per cent of their advances should be lent to priority sectors according to norms, which means that their interest spreads may be very narrow. The balance 25 per cent of their advances are stipulated to be lent to small advances at lower interest rates.

No details are readily available about their current financial position and the cost of administration. If the salary structure is to be on par with that of public sector banks, they may find it difficult to sustain. Sooner or later there will be demand for raising the pay scales comparable to other bigger banks.

The tendency of these banks is to concentrate in the major cities. This is not a desirable development as it has cost implications. Some of these banks appear to be uninterested in rural banking. There are a growing number of small towns, which have real potential for business growth. A large number of small borrowers in these towns are deprived of credit support. The new banks can take initiatives to explore the business prospects here.

As the objective of the Reserve Bank is “to extend the geographic coverage of banks and improve access to banking services,” the new banks have to adopt a programme of extending their branches to unbanked centres.  Selective branchless banking model could be a solution to control the cost of administration. Recently the Reserve Bank of India mooted the idea of part-time banking. These banks may consider this proposal to increase their presence in small towns.   

Two of these banks have strange names starting with abbreviated English alphabets and one has only two alphabets. These may not be easily remembered by the small borrowers.

Author :
Reported On :
Sector :
Shoulder :
IE, the business magazine from south was launched in 1968 and pioneered business journalism in south. Through the 45 years IE has been focusing on well-presented and well-researched articles. When giants in the industry stumbled to keep pace with the digital revolution, IE stayed affixed embracing technology.
Read more
Economist Communications Ltd is committed to ensuring that your privacy is protected.
Read more
You agree that your use of this Website and the purchase of the magazine will be governed by these terms and conditions.
Read more
S-15, Industrial Estate,
Chennai - 600 032.
PHONE: +91 44 22501236