‘Small’ isn’t beautiful for small finance banks

The Reserve Bank of India will meet in February for the final monetary policy review meeting of FY24. (File Photo: Reuters)
The Reserve Bank of India will meet in February for the final monetary policy review meeting of FY24. (File Photo: Reuters)

Summary

  • Created in 2016 to direct loans to smaller enterprises, farmers and under-served segments, SFBs are required to mention ‘small finance’ in their names

Mumbai: Shakespeare may have wondered what’s in a name, but for small finance banks, it perhaps makes a world of difference.

Executives of small finance banks (SFBs) have requested Reserve Bank of India (RBI) officials to let them drop the ‘small finance’ tag at a recent meeting, two people aware of the matter said. Dropping the tag will improve branding and customer connect, and attract more current and savings accounts (CASA), the people said, requesting anonymity.

Created in 2016 to direct loans to smaller enterprises, farmers and under-served segments, SFBs are required to mention ‘small finance’ in their names, and keep at least 75% of their loans below 25 lakh. Currently, India has 10 SFBs, many of which started their journey as microfinance institutions or MFIs.

“One of the suggestions was to replicate the cooperative bank strategy, where it is called just a bank, and the word ‘cooperative bank’ is mentioned below the name," said the chief executive officer (CEO) of an SFB who attended the meeting with the RBI officials. “Customers keep asking us if you are just a microfinance lender. We feel a name change will help bring clarity in the minds of customers and raise low-cost deposits," the banker said on condition of anonymity.

Cooperative banks such as Saraswat Co-operative Bank and Kerala State Co-operative Bank already identify as ‘Saraswat Bank’ and ‘Kerala Bank’ in their websites, mentioning their full names below.

Interestingly, the websites of almost all SFBs, barring Ujjivan SFB and North East SFB, have already dropped the label from their domain names. A hoarding of AU Small Finance Bank around its regional office in Mumbai’s Kurla reads simply AU Bank. AU SFB and an RBI spokesperson did not respond to emailed queries.

“SFBs are careful when it comes to rebranding themselves as just banks. But the label of small finance banks has been dropped from domain names in anticipation of a change to a universal bank in future," the CEO of an SFB said on condition of anonymity.

The lenders have conveyed their request to RBI through their association, a Unity SFB spokesperson said, adding that these banks feel that the use of the word ‘small’ may limit the comfort of two important stakeholders—depositors and investors.

“Initially, the word ‘small’ was included in the name to give emphasis on inclusive banking as their main objective. Over the years, each of the SFBs has successfully delivered on lending to small and micro businesses. To further promote inclusive lending growth, building CASA and fixed deposits is essential. Therefore, dropping the word ‘small’ from the name would help reduce the concerns of a section of depositors. Additionally, domestic and foreign institutional investors may tend to allocate a smaller portion of their investible corpus to an SFB as compared to other financial institutions as the general perception indicates that there could be fewer services (in number and size) offered by SFBs, thereby limiting growth," the Unity SFB spokesperson added.

SFBs typically lend at rates as high as 30%, but their cost of deposits is high, too. The banks believe that branding differently will help them attract cheaper retail deposits.

“The entire banking sector is struggling for retail deposits, and this struggle is more pronounced for SFBs looking to grow at a faster pace. In this quest for deposits, these SFBs are fighting a war on two fronts—peer competition and customer perception of being an SFB. In this regard, they have reportedly asked RBI to allow them to use the tag of small finance bank below the name of the bank, and seek relief on borrowings from multilateral institutions. However, we believe RBI is unlikely to accept such a request and, thus, the struggle should continue, impacting their margins," said Anand Dama, a banking analyst at Emkay Global.

“Pending finalization and approval, if any, exemption of the term ‘small finance bank’ is factually incorrect and also as the same is not officially in public domain, it would not be proper to run a story on this topic at this juncture," the Association of Small Finance Banks (ASFBI) said. “As can be seen from the websites of all the small finance banks mentioned in your mail, none have excluded the term “Small Finance Bank" from their names," the association added.

ESAF Small Finance Bank managing director and CEO K. Paul Thomas had recently told The Financial Express that mobilizing CASA deposits continues to be the biggest challenge for SFBs. ESAF SFB’s overall deposits stood at 18,860 crore at the end of March quarter, with CASA as a proportion of total deposits at 19%. Other SFBs have a CASA ratio of 20-25%. Equitas SFB and AU SFB have CASA ratios at 33% each, while Suryoday SFB has a lower CASA ratio at 15%.

That said, SFBS have been chasing deposits ever since the licences were given out eight years ago. According to CareEdge Ratings, SFB deposits have grown faster than the rest since they offer higher interest rates. Deposits of SFBs grew at a compounded annual growth rate (CAGR) of 32% during the period from FY20 to FY23, against a CAGR of 11% for banking sector deposits. However, SFBs’ deposit share of the overall banking industry remains at just 1.1%.

“While SFBs have been building their deposit base by providing relatively higher interest rates, building up a stable CASA base will continue to remain a challenge with stiff competition from established commercial banks. The CASA deposit ratio for SFBs continues to trail behind the banking sector," the rating agency said in a report released in January.

According to RBI’s Report on Trend and Progress in Banking for FY23, many SFBs rely significantly on bulk term deposits, often acquired at higher rates, especially from cooperative banks. This suggests a high degree of interconnectedness of SFBs with cooperative banks, with the possibility of any shock to the latter sector spilling over to the former, it said.

According to the Unity SFB spokesperson cited earlier, prospective employees also believe that a ‘small finance’ bank may have a smaller runway for growth in career advancement, and tend to opt for other financial institutions.

While SFBs focus on increasing their deposit franchise by opening more branches, one needs to wait and see whether a name change will catch customers’ attention.

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