SFBs: Looking for innovation

While small finance banks are solvent and working well, we need to ask if there has been a breakthrough in stretching the inclusion agenda beyond MFIs

- M S Sriram

It has been a decade since the process of licensing small finance banks (SFBs) was announced. In terms of staying power and survival, SFBs have done much better than other banks.

Following the reforms of 1991, the Reserve Bank of India (RBI) was open to licensing private-sector banks and multiple licences were issued. In all 14 licences for universal banks were given in three tranches. Of these, from the first tranche of 10 banks, three were merged with other banks. In the next two rounds of four licences, one bank had serious problems with its business model and the moral fabric.

Similarly, after the announcement of new local area banks (LABs) in the Budget speech of 1996, 10 in-principle licences were issued over five years. Only six of them commenced operations and two quickly folded up. Of the remaining four, only two exist, one having successfully transitioned to an SFB and the other ceasing operations.

Along with those for SFBs, eleven in-principle licences were issued for payments banks. Of those one has got an in-principle licence to transition to an SFB and just four remain. The RBI is not issuing any further licences to payments banks and LABs.

Considering the somewhat patchy success of other categories of banks, SFBs have been remarkably successful. All in-principle licences were operationalised. Fincare SFB voluntarily merged with AUSEB in the normal course, without a crisis. Later two more SFB licences were issued. In these years there was no existential crisis for any SFB.

However, it is useful to see how SFBs have done visa-vis the objectives enunciated in the guidelines. Therein may lie some “survival” strategies that tramp the intended objectives.