SMALL FINANCE BANKS (SFBs) have shown a marked improvement in asset quality in recent years, and have managed to reduce some of the initial skepticism over their business models. However, a plethora of issues such as high cost of deposits, product concentration and geographical concentration has left the Reserve Bank of India (RBI) and investors unconvinced.
"The entire business model (of small finance banks) is microfinance or small ticket loan heavy with the cost structures of a bank. If you want to make money at a microfinance level, your cost structures would have to be like microfinance, and not like banks," says Bhavik Hathi, managing director, Alvarez & Marsal. Technology upgradation for a lot of these lenders has taken longer than expected, and they have been unable to morph out of their "original microfinance avatar," he added.
The RBI had issued guidelines for SFBs in November 2014 with an aim to provide financial assistance to the under-served customer segment. Small finance banks are subject to all RBI norms that are applicable to existing commercial banks including maintenance of the cash reserve ratio and the statutory liquidity ratio.
These banks must extend 75% of their adjusted net bank credit to the priority sectors as mandated by the RBI. At least half of the loan portfolio must constitute loans and advances of up to ₹25 lakh.
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