With the massive number of unbanked and underbanked individuals across India in mind, the RBI in August 2013 released a discussion paper titled Banking Structure in India — The Way Forward. Taking this concept a step further, it in September 2015 issued in-principle licenses to 10 entities for setting up small finance banks (SFBs) and 11 entities for payment banks; the regulator plans to hand out licenses on tap if all goes well. While most media attention has been focused on payment bank licensees, which comprise some of India’s biggest corporate names, conversation about SFBs, which include eight microfinance institutions (MFIs), one local area bank and one NBFC, has been subdued (see: Here, there, everywhere). Unlike payment banks, which aren’t authorised to lend, SFBs are full-fledged banks (albeit subject to certain restrictions) meant to further financial inclusion by provision of savings vehicles and supply of credit to small business units, small and marginal farmers, MSMEs and other unorganised sector entities. Consequently, not just are SFBs subject to all regulations pertaining to commercial banks, they are also required to extend 75% of credit to sectors classified as priority sector lending by RBI. Also, at least 50% of their loans portfolio should constitute small-ticket loans of up to Rs.25 lakh.
In a country where financial inclusion statistics are dismal, the opportunity for SFBs, many of whom are also experienced MFI players, is massive. According to an RBI report, 43.9% of all rural households rely on non-institutional sources of cash credit like professional moneylenders, who charge predatory interest rates. The Committee on Financial Inclusion headed by C Rangarajan notes, “…despite the vast network of bank branches, only 27% of total farm househ