Home / Industry / Banking /  Small finance banks seek to plug Rs1-10 lakh loan gap

New Delhi: Small finance banks are expected to lend significantly in the 50,000-10 lakh range, filling a gap left by microfinance institutions (MFIs), banks and non-banking financial companies (NBFCs).

Essentially, this is the same target group for the Micro Units Development and Refinance Agency (Mudra).

While small finance banks are a new category of lenders permitted by the Reserve Bank of India (RBI), Mudra is a government initiative.

On 25 September, Union finance minister Arun Jaitley launched a credit drive under Mudra, wherein banks, NBFCs and MFIs will provide 50,000- 10 lakh loans.

Microfinance is available only up to a total of 1 lakh while banks and NBFCs typically do not lend in the 1-10 lakh range.

“We do not plan to go macro overnight. Our aim is to provide 1-10 lakh loans as we have expertise in providing small loans," said Rupali Kalita, managing director, RGVN (North East) Microfinance Ltd, a small finance bank licence winner.

The Guwahati-based MFI operates in the northeastern states of Assam, Meghalaya, Sikkim, Arunachal Pradesh and Nagaland.

Other licence winners include Ujjivan Financial Services Pvt. Ltd, Janalakshmi Financial Services Pvt. Ltd, Equitas Holdings Ltd, Au Financiers (India) Ltd, Capital Local Area Bank Ltd, Disha Microfin Pvt. Ltd, ESAF Microfinance and Investments Pvt. Ltd, Suryoday Micro Finance Pvt. Ltd and Utkarsh Micro Finance Pvt. Ltd.

Interestingly, eight out of the 10 entities granted approval are MFIs.

Apart from other prudential norms that apply to scheduled commercial banks, small finance banks must ensure that loans up to 25 lakh make up 50% of their portfolio. However, Kalita said, her MFI will not immediately start offering loans of this ticket size.

As on 29 September, loans worth 24,913.93 crore have been disbursed under Mudra, which was launched in April with the aim to refinance loans given to micro enterprises.

The three categories under which loans are given include Shishu (up to 50,000), Kishore ( 50,000 to 5 lakh) and Tarun ( 5 lakh to 10 lakh).

According to Ratna Vishwanathan, chief operating officer, Microfinance Institutions Network, a self-regulatory organization for NBFC MFIs, there was a gap in the 1-10 lakh category and, therefore, the government and RBI came up with Mudra and small finance banks, respectively.

“In essence, a small finance bank is the most appropriate vehicle for microfinance clients, who are mostly marginalized farmers and unorganized business units, to graduate into micro enterprise," she added.

While launching the Pradhan Mantri Mudra Yojana in April, Prime Minister Narendra Modi said the new entity seeks to ease funding problems faced by the more than 57 million small businesses across India and will aim to reduce borrowing costs of these borrowers as it will provide refinancing at a relatively low 7% rate of interest.

MFIs typically provide loans with interest rates of 24-36%.

Radhakrishnan V.S., managing director and chief executive officer, Janalakshmi Financial Services, believes that with the renewed focus on this segment, banks, too, may look at it.

“The reason for the under-funding earlier was that there was no visible data. But same as microfinance institutions found out a way, small finance banks, too, will, and will be able to give more loans in this space," he added.

However, Ravi Trivedy, a consultant and former partner with consulting firm KPMG, believes that the large number of small-ticket loans will increase the operational and risk control costs, making the proposition expensive. “The spreads at a small finance bank will be much lower than what it is for MFIs," he added. In lending terms, spread refers to the difference in borrowing and lending rates of a financial institution.

Small finance banks must start operations within 18 months of being granted licence. Vishwanathan said for low value-high volume business, these new entities will address the gap through high technology and low-cost operations.

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