RBI turns down request to remove 'small finance' tag from bank name

Retaining it crucial given mandate for financial inclusion

The Reserve Bank of India (RBI) has turned down the request from small finance banks (SFB) to drop the “small finance” tag from their name, saying that SFBs are differentiated banks with specific objectives like financial inclusion.

“SFBs have been conceptualised as differentiated banks with specific objectives. The tag of having an SFB after their name is a key part of that differentiator. So, I do not think there is any requirement to modify that at this point in time,” said M. Rajeshwar Rao, deputy governor, RBI, in post monetary policy media interaction.

Also, the objective of these entities (SFBs) was to further financial inclusion among the underserved and unserved through high-tech and low-cost operations.

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“Meeting the priority sector lending (PSL) norm was a key part of the entire process. So, the norms continue to be at that level for PSL,” he added.

SFBs had pointed out the challenges arising from the “small” nomenclature, which is associated with them. They said extending loans is not an issue, but depositors are at times wary of such a tag.

In an interaction with the regulator, SFB officials argued that banks can continue with what they are mandated to do, that is catering to small customers without the small tag. This removes the ambiguity that may be there in the depositor’s mind.

SFBs are niche banks with a minimum net worth of Rs 200 crore, lower than other scheduled commercial banks (SCBs).

Considering their focus on financial inclusion, SFBs are required to lend at least 75 per cent of their adjusted net bank credit (ANBC) to priority sectors. This compares to 40 per cent in case of other SCBs.

Meanwhile, as a step to enhance SFBs’ capacity to manage interest rate risks, RBI has allowed them to deal in rupee interest derivative products.

This is also expected to help hedge interest rate risks in their commercial operations more effectively and provide greater flexibility. At present, SFBs can use only interest rate futures (IRFs) for proprietary hedging.