Norms on small banks fail to impress micro lenders

The Reserve Bank of India's (RBI) draft guidelines for licensing of small banks has failed to impress microfinance companies. While the central bank said it will permit micro-lenders to convert themselves into small banks, many of them are unwilling because of stiff net worth requirements and restrictions imposed on area of operations.

"An existing non-banking finance company/microfinance institution/local area bank, if it meets the conditions under these guidelines, could apply to convert itself into a small bank, after complying with all legal and approval requirements from various authorities. In such a case, the entity shall have a minimum net worth of Rs 100 crore," RBI said in its draft norms for licensing of small banks released on Thursday. The banking regulator added that it will give preference to micro-lenders, non-banking finance companies and professionals from banking sector to set up these niche banks.

Industry players and analysts, however, believe that it will be difficult for most microfinance companies in Andhra Pradesh to meet the net worth criteria. "While the guidelines are progressive and consistent with the financial inclusion agenda, it is almost impossible for most microfinance companies to meet the norms and convert themselves into small banks. Following the crisis in the sector, barring a few, all microfinance institutions in Andhra Pradesh now have negative net worth," Kishore Kumar Puli, promoter and chief executive officer of Trident Microfin, told Business Standard.

The microfinance industry in Andhra Pradesh had plunged into a crisis in October, 2010 after the state government introduced an ordinance to curb micro-lending operations of private players. The new law nearly crippled the industry as borrowers stopped repaying their loans and micro-lenders suffered huge losses that eroded their net worth.

But even those microfinance companies that either weathered the crisis or were not affected do not appear keen because of the restrictions on geographical presence.

RBI said that the area of operations of a small bank would normally be restricted to contiguous districts in a homogenous cluster of states or union territories so that the bank has the 'local feel and culture'.

The central bank clarified that if considered necessary the bank will be allowed to expand its area of operations beyond contiguous districts in one or more states with reasonable geographical proximity but added that its branch expansion plan for the initial three years would require prior approval of RBI.

"The concept of a small bank is good but if there are geographical restrictions it does not fit into our model. We have a pan-India presence. If we are looking to promote financial inclusion it should not be region specific, instead it should be based on occupation and other parameters," Samit Ghosh, chief executive officer and managing director of Ujjivan Financial Services (a Bangalore-based microfinance company), said.

At the end of March, 2014 Ujjivan had 350 branches across 22 states in India. Ghosh said the micro-lender, through its industry body Micro Finance Institutions Network (MFIN), will discuss with RBI to evaluate if the restriction on area of operations can be relaxed.

Industry analysts said SKS Microfinance, the only listed micro-lender in the country, may not opt to convert itself into a small bank for similar reasons. SKS' business is currently spread across 15 states. Senior executives of the company did not offer a comment on whether it will be interested in creating a small bank.