Cautious approach: The small finance bank model is on the slow track, experts say
The small finance bank model may still be a challenge ten years after its launch. According to banking experts, the regulator has taken a cautious approach in granting approvals.
Unity Small Finance Bank was the last to be licensed in this category in November 2021. As of December 2023, there were 12 small finance banks in the country. However, last month, the Reserve Bank of India approved the merger of Fincare Small Finance Bank and AU Small Finance Bank (AU SFB).
“RBI is looking at how the existing SFBs are doing. The idea is to make the model work and adding more numbers may not help,” said a senior executive of a private sector bank. The main reason for the slow approvals is that the existing models of small finance banks have not been fully tested, he pointed out.
Last week, the RBI had rejected two applications: Dvara Kshetriya Gramin Financial Services and Tally Solutions.
Aruna Sharma, former member of the RBI committee on digital payments, said SFBs that are already licensed are yet to stabilize. Sharma, a retired IAS officer, said, “After recent compliance issues, you have seen many banks being penalized regularly. The regulator therefore pays close attention to compliance issues.”
An internal screening committee, comprising the Governor and Deputy Governors of the RBI, reviews all applications and sends its recommendations to the RBI Central Board Committee for a final decision. Even if an applicant meets the eligibility criteria, the RBI retains the power to reject an application.
As of the third quarter of FY2024, the total net profit of eleven small finance banks, excluding North East Small Finance Bank, stood at Rs 1,525 crore, up 23 per cent from Rs 1,240 crore in the corresponding period last year.
Investment information and rating agency ICRA expects the growth of SFBs to remain stable at around 22-25 percent in FY2025.
“It remains important for the sector to further improve the granularity of its deposit base and build a stable retail deposit franchise to support targeted growth,” said Karthik Srinivasan, Senior Vice President & Group Head, Financial Sector Ratings, ICRA Ltd.
Cautious approach
> The regulator is cautious in approving models of small finance banks
> As of Q3FY24, total profit of 11 SFBs, excluding North East SFB, stood at Rs 1,525 crore
> As of December 2023, there were twelve small finance banks in the country
> However, last month, the RBI approved the merger of Fincare Small Finance Bank and AU Small Finance Bank
> Last week, the RBI had rejected two applications from Dvara Kshetriya Gramin Financial Services and Tally Solutions
First print: April 24, 2024 | 12:08 pm IST