Comments
The microfinance business will now be dominated by small finance banks (SFBs) which will bring down systematic risk but at the cost of lower returns, according to India Ratings and Research.
Of the 10 shortlisted candidates for small bank licence by the RBI, 8 are micro finance institutions (MFIs), one mainly a commercial vehicle financier and one a local area bank.
“The total managed loan assets (on-book, off -book and including their major subsidiaries if any) of the 10 SFBs was Rs 20,100 crore and balance sheet size was around Rs 22,200 crore in FY15. MFIs that have received approval as a universal bank and SFBs, stood at 54 per cent of NBFC-MFI gross loan portfolio in FY15,” India Ratings said.
Under the banking format they can provide multiple financial products including savings to the underserved individuals and MSMEs. Reserve ratios and deposit insurance will reduce systemic risk, and over time lower deposit cost could be transmitted to lower lending rates.
The gross loan portfolio of the NBFC-MFI sector in FY15 stood at 40,010 crore, of which Bandhan Bank (MFI till March 2015), accounted for Rs 9500 crore while the eight MFIs account for Rs 11,900 crore. More than 50 per cent of the microfinance landscape could be out of the mandatory purview of the micro finance credit bureaus.
SFBs will be subject to all prudential norms and regulations of the Reserve bank of India as applicable to scheduled commercial banks, except for the capital requirements (more stringent in case of SFBs) and the lending/business restrictions (priority sector lending requirement of 75 per cent of credit compared with 40 per cent for banks and 50 per cent of the loan portfolio with ticket sizes less than Rs 25 lakh.
SFBs would need to lend to the underbanked, which means higher investment into systems/processes and lending to individuals rather than groups, which will push up credit risk and cost, thus return on assets may decline to 1-2 per cent from 2-3 per cent in FY15.
India Ratings believes it would be prudent for SFBs to continue sharing borrower data with MFI credit bureaus which will help them as well as NBFC-MFIs exercise caution in over-leveraging the micro-borrower.
It said that these institutions will, at least for the next two to three years, target the same segment as the balance NBFC-MFIs in most states. Hence Bandhan Bank, and in future, SFBs should continue sharing data and limit borrowers from borrowing from more than two entities to avert over-leveraging the borrower.
SFBs may offer higher interest rates on deposits compared to commercial banks to ramp up current account saving account (CASA) and term deposits and could be largely wholesale deposit funded in the initial three to four years.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.