Small finance banks: Gold loan firms, MFIs seem keen on licence

Interest among both segments after Thursday's final guidelines, although many say they'd prefer to wait and watch, especially as there's no time limit for applications

Gold loan companies and microfinance institutions (MFIs) are keen on applying for small finance banks licences, to expand their scale of operations. On Thursday, the Reserve Bank of India (RBI) issued final guidelines on small finance banks according to which these banks are not to have any restriction in the area of operations.

Both gold loan companies and MFIs are registered with RBI as non-banking finance companies (NBFCs).

The proposed banks will primarily undertake the basic banking activity of acceptance of deposits and lending to unserved and underserved sections. These small finance banks can also aspire to transit into universal banks in the course of time.

“There is strong interest from NBFC-MFIs for small finance banks licences. Becoming one is not really aspirational but they are perhaps as a class of institutions best suited to meet the stated policy goals of financial inclusion,” said Alok Prasad, chief executive of the Microfinance Institutions Network (MFIN).

The earlier draft guidelines had restrictions on areas of operation. In the final guidelines, this was removed. “For NBFC-MFIs, this is a positive development. It will allow them to have scale and sustainability,” added Prasad.

So, too, with gold loan NBFCs. “It is good to see RBI taking concrete steps towards serving the country’s underserved population. It is this resonance from the regulator that gives us more confidence to do our bit for furthering financial inclusion,” said George Alexander Muthoot, managing director, Muthoot Finance, the country's' largest gold financing entity. “We are surely interested and our board members are studying the new directives of RBI and will undertake a decision on it soon.”

However, say experts, the majority of NBFCs will not be eligible. “The guidelines mention proposals from large public sector entities and industrial and business houses, including from NBFCs promoted by them, will not be entertained. Local focus and ability to serve smaller businesses is the key criterion,” said Espirito Santo Securities, in a note to clients.

The note added that MFIs will be interested in applying for small bank licences since this will address political risk and opens an opportunity to access savings in their target segment. Also, the competition for a licence might be limited. According to Espirito Santo Securities, given its target segment, size and size of its balance sheet, SKS Microfinance could emerge a frontrunner for a license, if it chose to apply.

“For larger NBFCs, the kind of allocation we will have to do on day one for Statutory Liquidity Ratio and Cash Reserve Ratio will put you negative on the bottom line, where it will take a long time to recover. I do not know how much of promoters or investors confidence you will get,” said a sceptical G S Sundararajan, group director, Shriram Group.

The larger players in the NBFC segment are planning to wait and watch. “We will closely evaluate the eligibility conditions, and implications on the company, and see whether we ­­­want to walk the path. Since this is anyway an on-tap item, we can take a decision about it even at a later stage,” said V Vaidyanathan, chairman, Capital First.