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April 24, 2024

Small Finance Bank Model: A Cautionary Tale of Slow Progress, Experts Say

Small Finance Bank Model: A Cautionary Tale of Slow Progress, Experts Say

The small finance bank (SFB) model, introduced nearly a decade ago, is still treading cautiously, according to banking experts. Regulatory authorities, they say, are taking a measured approach in granting approvals, citing concerns about the full testing and stability of existing models.

Unity Small Finance Bank became the latest addition to this category when it received its license in November 2021. By December 2023, there were a total of 12 small finance banks operating in the country. However, recent developments have indicated a deliberate pace from the Reserve Bank of India (RBI), including the approval of the amalgamation of Fincare Small Finance Bank and AU Small Finance Bank.

“The RBI is closely monitoring the performance of existing SFBs. The focus is on making the model work effectively, and adding more players may not necessarily facilitate this goal,” stated a senior executive from a private sector bank.

The slow pace of approvals stems from concerns that the existing models of small finance banks have not been fully tested. Last week, the RBI rejected applications from Dvara Kshetriya Gramin Financial Services and Tally Solutions, emphasizing the importance of adherence to compliance standards.

Aruna Sharma, a former member of the RBI committee on digital payments, noted that SFBs which have already been licensed are yet to stabilize. “Recent compliance issues have led to penalties for many banks. The regulator is placing strong emphasis on compliance matters,” she added.

An internal screening committee, comprising the RBI governor and deputy governors, meticulously reviews all applications. The recommendations are then forwarded to the committee of the central board of the RBI for a final decision. Even if an applicant meets the eligibility criteria, the RBI retains the authority to reject the application.

As of the third quarter of FY2024, the combined net profit of 11 small finance banks (excluding North East Small Finance Bank) stood at Rs 1,525 crore, marking a 23 per cent increase from the previous year’s Rs 1,240 crore. Investment information and rating agency ICRA expects the growth of SFBs to remain steady at around 22-25 per cent in FY2025.

Karthik Srinivasan, Senior Vice President & Group Head, Financial Sector Ratings at ICRA Ltd., emphasized the importance of further improving the granularity of the deposit base within the industry. “Building a stable retail deposit franchise is crucial to support the envisaged growth,” he said.

In conclusion, while the small finance bank model holds promise for financial inclusion and growth, experts emphasize the need for careful consideration and adherence to regulatory standards to ensure its long-term success.

Jhumpa Lahiri

Jhumpa Lahiri

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