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4 things to watch out for small finance banks

Five small finance banks have started operations so far


Ten applicants received in-principle approvals from RBI in September 2015 to open small finance banks. Photo: Aniruddha Chowdhary/ Mint
Ten applicants received in-principle approvals from RBI in September 2015 to open small finance banks. Photo: Aniruddha Chowdhary/ Mint

Mumbai: After 10 applicants received in-principle approvals from the Reserve Bank of India (RBI) in September 2015 to open small finance banks, five entities have started operations so far. While the other two have received the final licence, the remaining three are waiting to receive the final nod. In-principle approval lapses in March, which means that they need to receive final licence before it expires.

1. Tie-ups with financial technology firms who provide credit scores

Esaf Microfinance and Investments Pvt. Ltd is in talks with financial technology companies who do credit assessment based on non-traditional tools. While Suryoday Small finance bank is running a pilot with Credit Vidya, one of these financial technology firms. This will help small banks to offer higher ticket size loans with the help of additional data points since they will venture into new portfolio segments.

2. Tapping into micro enterprise, vehicle finance, agriculture and housing loans segment

Esaf plans to have 20% of its loan portfolio for micro, small and medium enterprise (MSME) borrowers, 10% towards housing and agriculture and the remaining 70% towards microfinance borrowers in two years. According to Reserve Bank of India (RBI) norms, 75% of the portfolio has to be towards priority sector lending and at least 50% of its loan portfolio should constitute loans and advances of up to Rs25 lakh. Small banks will divert their portfolio towards housing, MSME, vehicle finance given natural inclination towards micro finance borrowers.

3. Giving higher interest in a bid to garner deposits

The five small banks which have started operations so far are offering interest on savings between 4% and 7.5%. On fixed deposits for six months to one-year tenure, they are offering interest between 6.5% and 8.5%—higher than what commercial banks are offering. However, one to two years down the line, once small banks have built their liability portfolio, the interest rate difference between commercial and small banks will diverge to certain extent.

4. Offering doorstep banking services through business correspondent (BC) channel

Suryoday plans to have three to five BCs for every branch. Utkarsh is looking for 18-20 BC outlets in each branch. Since most of the micro finance borrowers are daily wage earners, door step banking will be a key tool to bring those customers under the umbrella of formal banking. Since small banks cannot be BC for other banks, it will operate through its own channel.

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