Small Finance Banks is one of the niche banks in India. These banks are set up to provide basic banking services of lending and deposit and other small banking functions to help the small business owners and mid and small-sized firms. Basically, the aim behind small finance banks is to provide banking facilities to small and marginal farmers, micro and small industries, and unorganized sector entities who are not catered by regular banking sectors and prove to be the last resort for those entities. FinanceShed brings a complete analysis of small finance banks and the growth potential they carry.
Out of the 10 organizations approved in 2015 for setting up small financial institutions and to become India’s first small finance banks, eight were microfinance institutions. This shows RBI’s intention of providing services to the unbanked and financially underserved and saw the potential of a microfinance institution in delivering to the required. Small Finance Banks are likely to grow at as much as a higher percentage as 30% in the near future if they can arrange an additional capital of 4000 to 6000 crore that is required to fulfill the working capital needs of the concerned banks. These banks have grown on a huge scale in a very short span of time in assets under management, deposits, and better return on their equities.
The projected growth rate can be achieved only and only if the banks can manage to get additional funds as per their requirements. For this, banks can go for initial public offerings in line with regulatory requirements. These banks have made good progress with deposits and diversification with various product mixes. Also, the asset quality indicators have grown to a large scale. These are the best bank for small business and also target a specific market and tailor the bank’s operations to this target market’s preferences.
India has a huge potential for microcredit which is clearly anticipated by the growth achieved by these small finance banks. The challenge here was that SFBs had to comply with cash reserve (CRR) and statutory liquidity (SLR) requirements. These requirements were enough to swipe the profitability of these small finance banks. Till the second quarter of Financial Year 2017-18, these banks failed to impress much but GNPAs have been trending down in the second half of the same year and the first half of Financial Year 2018-19.
The major reason behind the extraordinary success of these small finance banks is demonetization. Demonetization served a hard blow on business growth and earnings and situations like cash crunch and disruption in borrowers’ cash flows helped small finance banks to grow. Secondly, many microfinance customers are unaccustomed to deal with formal institutions with fixed hours and rigid processes of nationalized banks and their processes. This also helped small finance banks to develop. Further, we know that most of the Indian population lives in the village. They do not have access to bank branches near them for them the setup of microfinance is easy to access. Also, India’s financial services customers are not adopting digital banking as quickly as customers in other emerging markets for the small finance bank is an easy option to choose.
These are the reasons why small finance banks are gradually moving towards growth though it will take time to demonstrate their full potential but will definitely outperform this situation.