Small Finance Banks: Have They Delivered on Their Financial Inclusion Promise?

Nice webinar by Amulya Neelam of Dvara trust. The webinar was held yesterday and recording is available.

The webinar summarised findings from her research paper. She points to financials of Small Finance Banks and shows how they look much like private sector banks.

We see from the discussion above that SFBs have largely done well in maintaining profitability despite the more stringent regulatory mandates of the RBI, such as higher priority sector lending requirement and loan size restrictions. This has been driven by the high spread between deposit and lending rates
and holds despite their cost of funds for SFBs being double that of public and private sector banks.

However, one must not jump to conclusions about the success of the SFB model towards meeting the objectives of financial inclusion as they are still very nascent in their functioning as full-service banks. It appears that the SFBs’ strategy and expansion are most akin to that of private sector banks.

What is notable is that despite being erstwhile microfinance institutions, the SFBs’ business, lending and to an extent deposit-taking, do not see rural centres being serviced considerably more than what is being done by existing banking models (except for RRBs). Thus, given the strategy adopted so far by SFBs, it
brings into question how well the business-model-level regulatory prescriptions help in fulfilling a financial inclusion mandate. Additionally, a more granular understanding of the benefits at the customer level is required.

We need to understand how many of the previously unbanked/underbanked populations are being catered to by SFBs. We see currently that much of the
SFB branch network is in the semi-urban and urban areas. It is unclear whether these branches are catering to such customers of these areas. It may, however, be a positive sign that all the ten applicants are still functioning and appear to be continuing operations smoothly and expanding. A repeat of the
analysis using data for a longer period (of operations) would yield more insights into the sustainability of the SFB Model and the utility of having a business model-level regulatory approach as laid down by the RBI.

It is surprisingly actually. Most of these SFBs were earlier microfinance institutions and should have done much better on financial inclusion and may be struggled on profitability. What we see is the opposite…

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