Rural areas pose hurdle for small finance banks

The lenders want the central bank to relax norms for three years, which the RBI may not consider

With merely 8 months remaining to start operations, small finance banks are facing headwinds to open 25 per cent of their total branches in unbanked areas as it will impact their profitability.

The Reserve Bank of India (RBI) has mandated that the small finance banks have to open at least 25 per cent of their branches in unbanked rural areas within one year of their operations.

Unbanked rural areas are the centres having a population less than 9,999 as per latest census. The annual branch expansion plans of the small finance banks for the initial five years would need prior approval of RBI.

Three-year period

In a recent meeting with the banking regulator, the small finance bank representatives have requested the regulator to give them three years to comply with the norms.

“Most of the small finance banks will be converted from microfinance institutions,” said a senior official from a microfinance institution which has received a small finance bank licence and was present in the meeting. MFI branches are much simpler than bank branches. The cost of opening or converting the present branches into full-fledged bank branches is higher.”

“The time taken by branches in the unbanked areas to break even will be higher. So, to convert all the present MFI branches into bank branches in one year will be very challenging from the profitability point of view,” another official who was present in the meeting said. However, the regulator may not oblige as it feels the regulations were known to the applicants while they were applying, said one official. “It is unlikely that the RBI will give us any forbearance,” the official added.

Ten licences

In September 2015, RBI granted in-principle licences to 10 entities to start small finance banks. These entities will have to start operations within 18 months, else the licences will lapse.

Out of the 10, nine entities were predominantly involved in microlending.

Only one entity, out of 10 that received licences, has commenced operations – Jalandhar headquartered Capital Small Finance Bank, which was a local area bank earlier.

A couple of licencees like ESAP Microfinance and Suryoday have applied for the final licence while Equitas Holdings has already received it.

The other issue that is posing a hurdle is that compliance with the Basel norms. According to the guidelines for small finance banks, RBI had said as small finance banks are not expected to deal with sophisticated products, the capital adequacy ratio will be computed under Basel Committee’s standardised approaches.

However, since all the existing banks are converting into the advances approach of Basel norms, there is a thinking that the new banks that are coming up should also adopt the advances approach.

Small finance banks have to maintain a minimum capital of Rs.100 crore.