BackSeven healthy habits for the new small finance banks
As much as 75% of the credit advanced by small finance banks will need to go to priority sectors, such as agriculture, small enterprises and low-income earners, while the commercial banks have only to mandatorily lend 40% of their net bank credit to such sectors
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The Reserve Bank of India (RBI) recently granted 10 entities in-principle licences to open small finance banks. The aim is to give access to financial services for those living in rural and semi-urban areas. Small finance banks will offer basic banking services, accept deposits and even lend. The differentiating factor, however, is that they will largely cater to the small business units, small and marginal farmers, micro and small industries, and entities in the unorganised sector. This pie that the larger banks shun will be the target audience for these new banks. Since they are in the business of banking, their income will come from lending. As much as 75% of the credit advanced by small finance banks will need to go to priority sectors, such as agriculture, small enterprises and low-income earners, while the commercial banks have only to mandatorily lend 40% of their net bank credit to such sectors. Small finance banks will also have to ensure that 50% of their loan portfolio constitutes advances of up to 25 lakh. Here is a list of seven healthy habits that these new banks can inculcate.
Do a comprehensive due diligence on the borrower: Most lenders today just ask for know-your-customer documents at the time of lending. During the loan tenure, the borrower may move places or change her mobile numbers. It is when such as a borrower begins to default and the banks try to reach out to her that it is found that the communication details are not active or updated. It would be beneficial for new banks to make it mandatory for the borrower to update or communicate with the lender twice a year.
Check the borrower’s ability to service the loan: It is one thing to issue loans to every second person that applies just to meet sales targets, and it is quite another to lend to a credit-worthy borrower. And for the new banks since ticket sizes are smaller and many may be first-time borrowers, it is advisable to be diligent. Documents may not be available in the first place. First-time borrowers need to, for example, prepare their net worth statement, among other things, and give confidence to banks that they are worthy borrowers.
Focus, work, spend on financial education and counselling: It would be beneficial to outsource such jobs or train their staff to do it right. So far, we have seen institutions in the name of financial literacy and counselling trying to hard sell their own products rather than educate. An outsourced entity can deal with this job without subjective bias or do any product-specific hard selling.
Build relationships rather than folio numbers: Most of these banks have the potential to grow to become mainframe banks. Rather than bogging down the first-time entrant with complicated forms, these lenders should focus on simplifying the process. Mobile penetration is better than Internet in the rural or semi-urban segment. These banks would benefit if they focus on building their technology on the mobile platform rather than the Internet. It would prove profitable if the new customer visits the branch often rather than insist on automating processes. Mobile apps can be developed for transactional needs. However, the initial transactions can be done by visiting the branches. These may be expenses initially but can prove to be better investments in the long run.
Emphasis should be on customer service: After-sales service has to be impeccable as the banks are dealing with first-time formal borrowers. Most may have been borrowers in the unorganised sector and may have a bad experience with money lenders. These borrowers need to be handled with care.
Build robust credit worthy portfolios: These lenders should not only focus on customer acquisition but also retention. The objective is to build long-lasting relationships. In the future, when these borrowers need fresh credit, they should not be rejected as bad borrowers. Hence, it is important that the banks educate, advise and ensure they are credit worthy borrowers. Continuous communication, after-sales service and financial education will ensure credit worthy borrowers in the ecosystem.
Financial inclusion is the goal: Small finance banks have taken the lead or have been given the huge responsibility of focusing on financial inclusion. Hence, they should abstain from reckless lending, lending to the friends and families of promoters without checking credentials, among other things, and later ending up with non-performing assets. Cash transactions should be avoided so that accountability and transparency are maintained.
The future banks will be benchmarked against the first set of small finance banks. So, they have a big responsibility to perform and deliver. Competition is always good and choices are even better. Small and marginal borrowers too deserve better lending entities. Let them not be at the mercy of larger banks alone who offer priority sector products out of compulsion.
Aparna Ramachandra is founder director of www.rectifycredit.com
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