Small finance banks needed to achieve financial inclusion: Expert

Small finance banks need to be set up in order to achieve the government's objective of making banking services available to low-income groups at an affordable cost, a leading financial sector expert said.

"We need to fall back on the commercial banking model for seeking a satisfactory solution to the problem of increasing financial inclusiveness. Setting up of small finance banks that will have linkages both with big banks as also with small entities will help in widening access to retail clients," Clearing Corporation of India's Chairman R H Patil, said at a function here.

The idea has been proposed by the Rajan Committee, he said.

So far, the concept of small banks has not been very much favoured by many due to the unsatisfactory track-record of many existing small banks which have poor governance structure, excessive government and political interference, and unwillingness of the regulator to undertake prompt corrective actions, he said.

"But compared with other options like co-operative banks or the regional rural banks, the proposed small finance banks model will prove to be a far better choice," he said. There should be strong emphasis on good corporate governance, high-quality lending and low-cost structures for these banks, he said.

"Given the nature of their asset portfolio, it is necessary to stipulate a strong capital adequacy ratio. To begin with, each bank should have a capital of at least Rs 200 crore so that only relatively strong candidates jump into the fray," Patil said.

He said small finance banks should essentially be like regional area banks, with their area of operation well defined at the time of granting them a banking license. Up to four-five candidates may be considered for grant of small banking license in any region.

"Licenses could be given to those non-banking financial companies (NBFCs), that already have a good governance track-record in areas such as housing finance, retail business and leasing, and industry or corporate houses with a good governance track-record," Patil said.

With regard to NBFC applicants, the Reserve Bank needs to be particularly careful in its scrutiny as the experience so far has not been uniformly satisfactory, he said.

While these banks would be pursuing mainly the inclusiveness agenda, they need not be precluded from having a small part of the business in favour of large clients so that it is possible for them to have cross subsidisation in favour of smaller clients, he said.