It has been close to a decade since small finance banks (SFBs) commenced operations. These niche banks, set up to further financial inclusion, have given a good account of themselves, making them eligible to transition to universal banks.In an interaction with businessline, Baskar Babu R, MD and CEO, Suryoday Small Finance Bank, and Chairman, Association of SFBs of India, observed that the sector has few operational constraints vis-a-vis universal banks.However, he emphasised that if the central bank were to address regulatory differences such as the “small finance bank” nomenclature and restrictions on co-lending, then there is no reason why SFBs cannot continue to thrive as standalone institutions.
Given that SFBs were set up nearly a decade ago, is there a need for the regulatory framework to evolve further?
Fundamentally, an SFB is already meeting almost all the financial needs of its chosen customer segment. From a business perspective, there are very few operational constraints.When the SFB guidelines were issued in November 2014, certain limits were prescribed. For instance, at least 50 per cent of the loan book must consist of loans of up to ₹25 lakh. One would expect those thresholds to be revised over time to reflect inflation and the growth of the economy.That said, most SFBs are still comfortably meeting all the prudential norms. Even if the RBI were to revise the thresholds, it would simply be a natural progression rather than a fundamental change in the business model.We can offer home loans, vehicle loans, business loans, and accept deposits just like any universal bank. The regulatory framework is broadly similar.Our priority sector lending (PSL) requirement is higher but, in practice, most SFBs already have 60-70 per cent of their loan book under PSL. So, that isn’t a constraint for growth. There is very little that prevents an SFB from serving its target customers effectively.
