Small finance banks in rush to beat deadline

Capital Local Area Bank could be first to start operations by April, a year ahead of the target date

Anticipating significant competition several proposed small finance banks are scurrying to capture the market for thrift finance. A number of them are targeting full-fledged launch in August-September 2016, much ahead of the deadline of April 2017.

Jalandhar-based Capital Local Area Bank could be the first one to start operations. It plans to seek final regulatory approval by the second week of January 2016. The bank has set April 13, 2016, as the deadline to start operations. Suryoday, Disha and ESAF are the other micro-lenders going for early launch of banking operations.

"We are operating as a local area bank, so we have a banking set-up in place. We plan to seek final approval in early January. We also had a preliminary discussion with the Reserve Bank of India (RBI) about our application," said Sarvjit Singh Samra, managing director, Capital Local Area Bank.

The bank is in the middle of a rights issue to raise Rs 17 crore from its existing investors. It will begin operations with 49 branches.

According to RBI norms, small finance banks are to start operations by April 2017. In September 2015, the RBI had granted licences for 10 small finance banks. Earlier in August, the RBI had granted licences for 11 payment banks.

Suryoday Micro Finance is targeting to launch its bank by August 2016. It has appointed Ernst & Young as a consultant for the transition from micro-lender to a bank. It is raising Rs 100 crore equity from domestic investors, of which about Rs 30 crore is expected to come from the promoter group.

The proposed bank will start operations with 30 branches, and increase these to 100 in one year, according to R Baskar Babu, co-founder and CEO of Suryoday Micro Finance.

Key factors that could contribute to expedited transition of micro-lenders to banks are regular interaction and feedback from the regulator over compliance-related queries and the learning experience from the two new universal banks, Bandhan and IDFC. The two banks, which opened very close the RBI deadline, were required to meet more legal stipulations than the small finance banks.

Disha Microfinance is looking to launch its bank by the third quarter of 2016-17. "The two universal banks required much more legal restructuring than small finance banks. Moreover, the launch of the two universal banks served as a learning curve for banks, consultants as well as the regulator. The regulator is quick to respond to any clarifications from proposed banks," said Rajeev Yadav, director, Disha Group.

The lender has roped in KPMG and Ernst & Young for transforming itself into a bank. It has firmed up plans to raise Rs 100 crore as domestic capital through private placement. The Kerala-based ESAF is looking to launch its bank by August 2016 and has roped in Ernst & Young for the transition. "Every proposed bank is looking for an early launch in anticipation of competition from other small finance banks and payment banks. Moreover, we will roll out our bank with simple products, which does not require much time in preparation," said Paul Thomas, chairman and managing director of ESAF.

Some of the bigger financial institutions looking to convert themselves into banks like Ujjivan will only be launched by April 2017. Janalakshmi and Equitas, two other big microfinance institutions, did not divulge their launch date. Equitas has filed a draft red herring prospectus for raising capital.

"We are devising strategies for the proposed bank. We will have a two-tier structure like Bandhan, separating microfinance and banking activities," said S Radhakrishnan, MD & CEO, Janalakshmi.

The north-east based RGVN (North East) Microfinance is looking to launch its bank by April 2017. The lender is in talks with investors for raising close to Rs 200 crore. In view of the less intense competition in banking in the north-east, the institution was not in a rush for an early launch, said Rupali Kalita, managing director, RGVN (North East) Microfinance.

Small finance banks are required to raise a substantial amount of their domestic capital before launch. At present, almost all have foreign shareholding, mostly private equity funds. According to RBI norms, the initial promoter stake should not be less than 40 per cent, locked in for five years, and domestic shareholding of at least 51 per cent.

EARLY-BIRD STRATEGY
Four proposed small banks are planning on a launch earlier than the April 2017 deadline to beat the competition

• CAPITAL LOCAL AREA BANK
  New launch date: April 2016
  Status: Raising Rs 17 crore through rights issue
   
• SURYODAY
  New launch date: August 2016
  

Status: Raising Rs 100 crore domestic equity
 

ESAF
New launch date: August 2016
Status: Adequately capitalised
 

DISHA
New launch date: September-October 2016
Status: Looking to raise Rs 100 crore via private placement by March 2016