Small Finance Banks have greater presence in well-banked States, says RBI report

Small Finance Banks (SFBs) have greater concentration of branch network in relatively well-banked States, according to an assessment in the Reserve Bank of India’s (RBI) latest monthly bulletin.

While there has been a rapid growth in the branch network of SFBs since their inception, this growth has been markedly concentrated in the Southern, Western and Northern regions, which are known as the relatively well-banked regions in the country, RBI officials Richa Saraf and Pallavi Chavan said in an article in the bulletin.

SFBs penetration in the North-Eastern region, which is known to be the least banked region, remains low, they added.

Following the issuance of the licensing guidelines in 2014, 10 SFBs have commenced operations so far. The first two, Capital Small Finance Bank and Equitas Small Finance Bank, started operations in 2016 followed by seven more in 2017, and one more in 2018. SFBs had 4,307 branches as at March-end 2020.

At the State level, while SFBs are making their presence felt in some of the under-served states such as Madhya Pradesh (7 per cent share in total branches) and Rajasthan (8 per cent). They continue to be concentrated in Tamil Nadu (16.6 per cent), Maharashtra (13.1 per cent), Karnataka (7.7 per cent), Kerala (5.5 per cent) and Punjab (4.7 per cent) - States with some of the lowest population per bank branch in the country, as per a preliminary assessment of these banks.

Among these, the States from the Southern region have had a high concentration of MFIs (microfinance institutions) since the time micro finance originated in India in the early-1990s, the article said.

SFBs too, many of which are MFIs turned into banks, have largely followed this pattern of branch expansion.

Furthermore, there appears to be some similarity in the branch spread of private sector banks and SFBs, with both showing a greater concentration in the relatively well-banked regions/states.

Branch expansion in semi-urban and urban centres

The article said the rapid increase of SFB branches has been in semi-urban and urban centres; in March 2020, about 39 per cent of the total SFB branches were semi-urban in nature followed by 26 per cent in urban centres

“Considering their small finance focus, the limited spread of SFBs at rural centres and even at smaller semi-urban centres leaves much to be desired,” the officials said.

Asset concentration

The authors observed that, at present, there is considerable concentration of assets within the SFB group. Top-two SFBs accounted for 46 per cent of total assets of all SFBs in March 2020 with top-three SFBs accounting for 60 per cent share.

However, the relatively big-sized SFBs have displayed lower growth of assets in more recent years. Hence, the concentration of assets within the SFB group may come down over time, the officials said

At present, SFBs constitute a minuscule portion of the financial sector (comprising the Scheduled Commercial Banks, including Regional Rural Banks and Urban Co-operative Banks, and Non-Banking Finance Company segments). Their share in total assets of the financial sector was 0.4 per cent in March 2019.

Priority sector

At the systemic level, priority sector lending accounted for about 75 per cent of the total credit of SFBs.

SFBs reported a greater concentration of loans to agriculture, trade and professional services. These three sectors accounted for about 65 per cent of the total credit of SFBs in March 2020 as compared to SCBs which lent about 66 per cent of their credit to industry, personal loans and finance.

In March 2020, 99.9 per cent and 83 per cent of SFBs total loan accounts and total loan amount, respectively, had a credit limit of up to ₹25 lakh.

Even within these, an impressive focus on very small-sized loans by these banks was evident; about 96 per cent and 48 per cent of their total loan accounts and total loan amount, respectively, had a credit limit of ₹2 lakh, or what are called as small borrowal accounts.