BFSI Summit: SFBs urge RBI to relax capital norms, shed 'small finance' tag

Chief executives of Small Finance Banks welcome move to allow them to transition to universal banks, but ask for glide path to lower capital adequacy norms vis-a-vis large banks

Small Finance Banks (SFBs) are keen to evolve into universal banks but seek regulatory flexibility and a relaxed path to capital adequacy norms, said top executives of SFBs at a panel discussion titled “Are SFBs ready to convert to universal banks?” at the Business Standard BFSI Insight Summit in Mumbai.

 

Baskar Babu Ramachandran, managing director (MD) and chief executive officer (CEO) of Suryoday Small Finance Bank, said the original purpose of SFBs was to serve customers underserved by larger institutions, and that the experiment has largely been successful.

 

Ramachandran, who has earlier said it will likely be another two years before Suryoday applies to become a universal bank, reiterated his concerns over nomenclature.

   

“The ‘small finance’ label has become a limitation; it often raises questions about regulation, status, and credibility,” he said, adding, “We’ve made representations to the regulator to address this, as evolving into a universal bank would help us grow further while staying true to our original purpose. Ultimately, we want to be recognised simply as Surya Bank, not Surya Small Finance Bank.”

 

SFBs highlight network and digital edge

 

Pointing to the network such banks already have in place, Unity Small Finance Bank’s MD and CEO, Inderjit Camotra, said SFBs are well-placed to grow given their strong presence in Tier-II and Tier-III markets and their technology-driven operations.

 

“RBI has been pretty clear on the path of becoming SFB. We are in a very beautiful place because we operate in Tier-II, Tier-III, and smaller cities. Here we have niche products like MSME, microfinance, gold, etc. It permits us to get higher margins. We are working steadily to get to the position of becoming large,” Camotra said.

 

He added that SFBs also have the advantage of starting out with greater digitalisation. “Our journey has been mostly paperless. Rural folks are ready to work with it. We have the advantage to leapfrog,” he stated.

 

Secured lending seen as key to growth

On product diversification, Camotra said SFBs are increasingly focusing on secured lending.

 

“SFBs are going more for secured assets instead of unsecured assets. We have started classes like micro LAP (lending against property). We are also going for gold loans. It is one of the best sources for working capital for something like an MSME,” he said, adding that secured cards are also being introduced to help build credit histories.

 

“Under secured cards, we give a small credit line to individuals, which builds their credit history, and eventually they can get more loans... We provide funding to get people out of the debt burden cycle,” he said.

 

PSL relaxation offers more flexibility

Babu added that the recent priority sector lending (PSL) relaxation provides SFBs scope to widen their product offerings.

 

Earlier this year, the RBI reduced the overall PSL target for SFBs from 75 per cent to 60 per cent, allowing greater operational flexibility. This change enables lenders to diversify and derisk their loan books by venturing into new segments. 

SFBs seek rationalised capital adequacy norms

On regulatory capital norms, Camotra said a gradual reduction in SFB capital requirements would unlock growth.

 

“Capital adequacy norms in India for small finance banks are to keep 15 per cent, while for banks it is 9 per cent with a buffer of 2.5 per cent. We have been requesting the regulator that if capital adequacy norms come down in a glide path, that will free up a lot of capital for us and that will translate into acceleration of the balance sheets,” he said.

 

Babu, however, cautioned that maintaining strong buffers remains essential.

 

“Globally, most universal banks maintain capital levels nearly double the regulatory requirement. The ideal capital requirement depends on each bank’s risk profile… It’s always better to stay above the minimum threshold and know clearly what level of capital you need to sustain growth and stability,” he said. 

Microfinance sector sees recovery

Discussing the microfinance stress cycle, Camotra said the worst phase is over.

 

“The inflection point of going from the bad times to the good times is about now. It is happening as we speak. We will be out of the woods in the next one or two quarters,” he said.

 

Babu added that the key lesson from past cycles is to focus on sustainable growth.

 

“The microfinance sector typically grows 15–20 per cent annually, but whenever it pushes for 40 per cent growth, it faces setbacks that take years to recover from,” he said, referring to the industry’s earlier practice of extending multiple loans to a single borrower, which eventually led to defaults.