Small finance banks to outsource various ops to universal banks

This could be a win-win situation for both, as universal banks will earn a fee for handling some of operations of SFBs

Entities that have secured an in-principle approval to become small finance banks (SFBs) are looking to outsourcing key operations such as treasury and cash management to existing universal banks. SFBs say outsourcing these operations, for which they do not have expertise, might prove more cost-effective, especially during the transformation stage.

This could be a win-win situation for both, as universal banks will earn a fee for handling some of the operations of SFBs.

“Initially, there could be cost of fund implication and liquidity implications, as we transform ourselves into a bank. So, banks are suggesting SFBs might not want to do everything on their own and, instead, can collaborate with existing universal banks and work with them. For instance, they can run the treasury desk for you or the cash management services,” said Rajeev Yadav, director, Disha Group.

R Baskar Babu, chief executive of Suryoday, is also looking at a similar move. “We have begun talks with the bank to see if they can manage the statutory liquidity ratio, the cash reserve ratio, etc, for us. Initially, it might not be feasible for us to do some of these, which require special expertise or a wide network, on our own. It might make more sense to do a tie-up.”

Not only treasury operations, even for specific loans such as gold loans, such banks plan to look at collaboration with universal banks. “It might not make sense to go for some niche products such as gold loans on our own, initially. But we want to offer a bouquet of services to our customer. So, we can tie up for these. For instance, if it is a home improvement loan, then it might not be possible for us to go for it at the same rate as a bank, as our cost of funds will be higher. So, there is an opportunity to collaborate here, too,” Yadav said.

Such collaborations aren’t new to the banking sector. For instance, IndusInd Bank offers home loans to its customers in collaboration with Housing Development Finance Company.

Ashvin Parekh of Ashvin Parekh Advisory Services says outsourcing treasury or specific lending operations by SFBs would be a good move. “In the first few years, the financial viability of SFBs will be thin. It will make sense to focus on some specifics. More, treasury operations of SFBs will be more from a compliance perspective. I don’t believe the focus will be much on churning the portfolio. So, it might augur well for banks to outsource this.”

Last month, the Reserve Bank of India had granted SFB licences to 10 of the 72 applicants.

These SFBs will be similar to existing commercial lenders and will undertake basic banking activities such as accepting deposits and lending to the un-served and under-served sections.

Their loan size and investment limit exposure to single and group obligators cannot be more than 10 per cent and 15 per cent of their capital, respectively. Also, at least 50 per cent of their loan portfolio has to include loans and advances of up to Rs 25 lakh.

The regulator has said in time, small banks could convert themselves into universal banks, though the transition would depend on RBI’s approval.