BS BFSI Summit: SFBs should look beyond universal licence, says R Gandhi

Ex-RBI deputy governor says they must become financial conglomerates

Small finance banks (SFBs) should aim to grow into financial conglomerates based on their experience, instead of becoming universal banks, as there is huge scope for these entities to serve the same clientele in terms of investment and insurance offering, said R Gandhi, former deputy governor of Reserve Bank of India (RBI).

Delivering the keynote address at the Business Standard’s BFSI Insight Summit session on SFBs, Gandhi said: “That is the growth path I would suggest for the SFBs rather than losing their focus becoming universal banks and by being in all types of business. You should play a specific, niche role in the economy and grow big. This way they will be able to do service to their stakeholders”. He said SFBs can grow big given their track record. “If they want to grow as a universal bank, then they have already reached the basic capital requirement”.

Gandhi did, however, have a word of caution. He said if they become a universal bank, though they will have the flexibility to lend in the microfinance, small finance, or large finance space, there will also be enhanced compliances issues. Basel III will be a big burden, and there will be greater scrutiny across the board, not just from the regulator but also from the media and the general public.

 

Growth

In 2016, the RBI granted 10 entities SFB licences. And, in the past five years, the SFBs’ balance sheet has grown about 4-5 times from Rs 27,000 crore to Rs 1.32 trillion. Deposits, too, have grown from Rs 5,000 crore to Rs 82,000 crore. The asset side grew from Rs 17,000 crore to over Rs 90,000 crore.

The liabilities of the SFBs were predominantly in term deposits and the asset side saw a distinct shift from unsecure microfinance loans to more secured small finance loans. “So, they were justifying the very logic for which they were created,” Gandhi said.

When we talk about small finance banks, the very thought cropped up in the minds of the RBI officials as a means to further financial inclusion in the country, Gandhi said.

Gandhi said: “Financial inclusion as a serious responsibility had been shouldered by the micro-finance institutions (MFIs) because they were always related to the bottom of the pyramid and microfinance was the centre of attention in those times”.

Besides, after 2010 MFIs started exhibiting evidence on the ground that microfinance is a commercial proposition and through alternative models it would be possible to finance the needy at the bottom.