Capital local area bank to Capital small finance bank..lessons from history??

Jalandhar based Capital Local Area Bank transitions to becoming a small finance bank. Earlier, it could operate in  just five districts and now can open pan India branches. Ujjivan is perhaps the next in line with an IPO lined up.

Capital Small Finance Bank, India’s first small finance bank, was launched here on Sunday. It opened 10 new branches on its inaugural day. The Jalandhar-headquartered bank had been operating as Capital Local Area Bank since January 2000 with 47 branches in five districts of Punjab. It is among the 10 entities that were given the in-principle approval by the Reserve Bank of India (RBI) to set up small finance banks.

Sarvjit Singh Samra, managing director of Capital Small Finance Bank, said the bank’s transition from a local area bank into a small finance bank has removed the geographical barrier of expansion. Earlier, the lender’s operations were restricted to five districts in the state – Jalandhar, Hoshiarpur, Kapurthala, Amritsar and Ludhiana. Now, the lender can expand in any part of the country.

Samra, however, plans to grow in a phased manner. In the current financial year, the bank would consolidate its in Punjab by adding 29 branches. Out of this, 10 were opened on Sunday. The bank’s business is projected to increase four-fold from Rs 3,000 crore as on March 31, 2016 to Rs 12,000 crore and branch network to 216 by March 2021.

Samra said that under RBI’s statutory guidelines, small finance banks should lend at least 50 per cent of their loans to an average ticket size of below Rs 25 lakh. For Capital Small Finance Bank, exposure to small ticket borrowers is 60 per cent, he added. The bank’s priority-sector lending, too, is higher at 79 per cent of total advances against the RBI norm of 75 per cent.

Being the only bank with seven-day operations in rural areas, Capital Small Finance Bank expects to achieve its targets as planned.

There is also this interview of Mr Samra. the chief of the bank.

Again for whatever people and media might think, small banks is hardly anything new. Post 1905 Bengal partition, Swadesi banks start to mushroom across the country. Within these banks. we had both big and small banks. Within small banks, there were many variants based on capital:

  • A1 banks: scheduled banks with capital and reserves above Rs 5 lakh
  • A2: non- scheduled banks with capital and reserves above Rs 5 lakh
  • B: non- scheduled banks with capital and reserves between Rs 1 lakh and Rs 5 lakh
  • C: non- scheduled banks with capital and reserves between Rs 50,000 and RS 1 lakh
  • D: non- scheduled banks with capital and reserves less than Rs 50,000

Post multiple failures of banks especially of Travancore and Quilon Bank in 1930 and Palai Central Bank in 1960, set in a process of massive consolidation in Indian banking sector. At that time too, the good small banks were looking to create a niche and serve different customers with most based in rural sector. But given the times and regulator/government’s disregard for small banks, they just lost out the race to big banks.

Infact most big banks which were nationalised started as small banks which fought out competition and really hard times to survive and  grow. So, small banks has been part of Indian banking before they were thought as unwanted by regulators/govt.

Having said this some small banks did survive. There were certain small banks which survived both nationalisation and competition. These are the old private sector banks out of which  twelve continue to remain. Their capital base is not very far off from the small finance banks which have been licenced recently. The small finance banks are required to have a paid up capital of Rs 100 cr. Let us see the capital base of old private sector banks as on 2014-15:

  1. Karnataka Bank – 188.5 Cr
  2. Federal Bank – 171 Cr
  3. Catholic Syrian Bank – 42 cr ( to come out with an IPO)
  4. South Indian Bank -135 Cr
  5. Dhanlaxmi Bank – 177 Cr
  6. Karur Vysya Bank – 122 Cr
  7. Lakshmi Vilas Bank – 181 Cr
  8. City Union Bank – 60 Cr
  9. Tamilnad Mercantile Bank – Rs 28.4 lakh (this is really surprising given such a low base. Though the bank has high reserves which has kept it afloat)
  10. Ratnakar Bank – 293 Cr
  11. J&K Bank – Rs 48.5 cr
  12. Nainital Bank – Not sure as 99% owned by Bank of Baroda

I am myself surprised to see the capital base of these banks. To see likes of Ratnakar Bank topping the list is a bug surprise. They have been on a capital raising spree since 2010 when the new management took over the bank.

Most of these old private sector banks, some being more than 100 years old (which is the oldest?) have capital in the range of just 100-200 Cr.  Just for comparison sake- SBI has a capital of Rs 746 cr, ICICI Bank 1159 cr and so on.

In a way most of these old private banks are small finance banks who have restricted their growth space to serving local communities and regions. They have been serving the very ideas of financial inclusion which the government and regulators wish these small finance banks end up doing. The history of these old banks must indeed be fascinating given the longevity despite highly adverse times. How they served their regions despite remaining small are likely to be amazing lessons.

But not much is known about these banks. The regulator has hardly taken any interest in these banks and has just been interested in closing most of them. 25 such old banks existed in 1991 and have been reduced to just 12. There has been much more interest to keep recreating new banking institutions without looking at the older ones.

Most of these old banks have also been the quiet type as well which has not helped both their cause and of banking scholars.

So, will these new small finance banks which are old wine in a new bottle look up to their older bottles? Instead of trying to look at the obvious route of growth and try become a big bank, can they remain small and purposeful? How will these small banks differentiate themselves? It is one thing to say we want to create differentiated banks, completely another to differentiate themselves.

One important difference between these new SFBs and old SFBs is caste/community angle. Latter were formed mainly to serve their communities and local regions and were pretty much an endogenous thing. These new SFBs are exogenous policy driven and lack any of that caste/community angle. But then most of these new SFBs were already an NBFC/microfinance firm so it is not that they start from scratch like the older banks. The regulatory burden was mostly absent in case of most Old banks as they started before the RBI. But it is going to be a huge ask for the new SFBs. Actually, like a differntiated bank we need a differentiated regulatory approach as well. One cannot look at both big and small banks with the same lens which has been a problem for most such experiments in the past.  So, there are both pluses and minuses with both these new and old types of banks.

These are some of the questions which Capital SFB/other SFBs and regulator should ask themselves. No matter how much they look at their future prospects, much of what they do will be driven by history.

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