Small Finance Banks: Challenges

Providing banking and financial services to rural, low-income households and small businesses is always on the agenda of India’s banking policy.  Establishment of Regional Rural Banks, extending regulatory ambit to Urban Co-operative Banks, and architecting a regulatory framework for microfinance companies are significant institutional reforms in this direction. However, access to financial services by the larger part of the population (financial inclusion) and provision of credit to small and unorganised borrowers (financial depth) still remains very poor, reflecting wide regional imbalances across the country. Economically backward regions and rural populations have largely been excluded from the mainstream financial services landscape. To address this, the Reserve Bank of India (RBI) constituted the committee on Comprehensive Financial Services for Small Business and Low Income Households which recommended two new banking institutions -- payments banks and small finance banks. Following the committee recommendations, the RBI has granted licenses to ten financial institutions to function as small finance banks.

In this context the first part of this paper presents an analytical review of the failures and limitations of existing Indian banking institutions working in the domain of banking for low income households of rural and urban India. We also argue in favour of small bank competitive advantage by reviewing the literature based on available empirical evidence from developed and emerging markets.  The second part of the paper is a round table panel discussion on the challenges of small finance banks. The panellists, Sarvjit Samra, Rajat Singh and HKN Raghavan are CXOs of three new small finance banks. Sarvjit Smara has rich experience of heading a north India based local area bank, while Rajat Singh and HKN Raghavan are associated with microfinance companies with a large presence in south India. Thus the three panellists represent two different types of institutions (local area banks and microfinance companies) in two important geographical regions of India. The discussion brings out divergent views on the opportunities to build differentiated banking and the critical challenges in achieving this.