Page 38 - Banking Finance February 2018

ARTICLE

It is worth mentioning that NBFC-MFIs turned SFBs a) High costs of transformation
introduced the concept of financing to micro enterprises by b) Capturing the rural mass amid higher trust enjoyed
adopting Joint Liability Group (JLG) mode ,which banks also by commercial banks from the rural community,
started using for financing their small ticket borrowers. In aggressiveness in enhancing their market share ,low
the absence of alternate source of funding for the sector cost of deposit mobilization
and looking in to the huge gap in lending, SFBs by reaching c) SFBs may have to use innovative channels such as
out to the vast number of micro and small enterprises can mobile money or card based point of sales devices
increase the lending under MSE sector and in turn for which the infrastructure set up, channel
contribute for economic growth. Further, given their management, and investment in financial
expertise and operation as MFIs, meeting the 75 percent education will all pose challenges.
priority sector lending(PSL) may not prove to be a challenge d) The regulation requires SFBs to ensure that a single
for these SFBs, nor will ensuring that half the book is to shareholder holds a 40% stake in the organisation,
borrowers with less than Rs 25 lacs loans be. and this must be reduced to 26% in 12 years. It will
be a challenge for many MFIs turned SFBs as
Challenges promoters of almost all large MFIs/NBFCs have a
minority stake in the organisation.
1) Since the unbanked and underbanked population would
be first time users of formal financial services, it may e) The guidelines require SFBs to ensure a capital
adequacy ratio (CAR) of 15%, cash reserve ratio
be some time before they get familiarised with these.
(CRR) of 4%, and statutory liquidity ratio (SLR) of
Further ,as the target customers for small finance banks
21.5 %. These will be a significant burden to
are low-income households with certain degree of
manage, resulting in reduced earnings until SFBs
education and are not used to brick and mortar system,
develop a substantial depositor base.
they prefer door to door services. So, it may not be easy
to woo them and hence the way services are provided f) The guidelines put a cap of 74% foreign ownership
in SFBs. Currently, many MFIs/NBFCs have more
should be different from what universal banks. Further,
than 75% foreign equity due to investments from
SFBs will also face competition from Payment Banks
foreign sources. Bringing the figure to below 74%
under demand deposit portfolio. The SFBs probably
will be a challenge for these institutions considering
may have to increase the deployment of BC/CSPs and
the dearth of domestic equity sources.
their role.
g) NBFC-MFIs are experienced in offering generic
2) Hitherto, MFIs turned SFBs rely on borrowing from group lending products whereas banking would
other banks to grow. SFBs will now have to depend on require them to enhance the product suite by
their customers' deposits and shareholders' equity along adding other credit products such as micro and
with 'refinance' facilities from bulk lenders such as, small enterprise finance, term deposit and savings
NABARD, SIDBI and MUDRA Bank. Unlike credit which products. SFBs can also be part of clearing system
is a pull product, savings will see a gradual uptake, that either as a direct member or through the sub-
too only if trust and ease of transaction are established member route. The inexperience of NBFC-MFIs
upfront. The transformation will be an uphill task for turned SFBs in offering such products will result in
SFBs as mobilising retail savings is extremely challenging. a period of learning before they can stabilise their
product suite, its sales proposition, mix and channel.
As MFIs, some players grew at almost 100 percent
It will require a lot more effort to establish the
annually, but as they transition into a bank, they will
brand as a full service bank that is trustworthy as a
have to face slow growth in the initial years as they grow
custodian of precious savings.
their deposit base.
3) Transformation to SFB entails changes in the business Concluding Remarks
model, organisational structure, capital structure, The banking landscape in our country is going through
product suite, IT/MIS, and others. These changes will unprecedented changes and challenges. No doubt , the
lead to following challenges : payment banks and small finance banks will create

38 | 2018 | FEBRUARY | BANKING FINANCE

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