Recently the Reserve Bank of India refused to grant licences to Dvara Kshetriya Gramin Financial Services and Tally Solutions Private Ltd to set up their respective small finance bank. While the denial did not surprise many, given that the licence applications were kept pending for almost three years, it nevertheless sends a strong message to banking aspirants. 

Dvara is a well-established financial service outfit largely focused on bottom-of-pyramid borrowers and is entrenched in the southern India market. It works in the sphere of financial inclusion, making it a perfect candidate for an SFB licence. Tally is a software provider and a hit product among small and medium businesses. It’s perhaps one of the brands that almost every shopkeeper, businessman and anyone remotely in the business of maintaining books of accounts would know about. The software offers potential to integrate the backend of lending with the front end of finance. It would have made for a potent experiment in the small-ticket business loans segment. 

Yet, if these two worthy names didn’t make the cut then what really could be the reasons? Dvara’s assets under management, as of March 2024, stood at ₹2,266 crore. While ideally size didn’t matter when nine microfinance institutions (MFIs) were converted into SFBs in 2014, did the regulator take a cue from the struggles for scalability that some of the predecessors faced (and perhaps continue to face) when turning down Dvara? 

Likewise, rejecting Tally’s application seems to send out the message that if you don’t have prior lending, more so banking knowledge, then don’t experiment with a licence. 

Did the ownership structures of both entities not cut ice with the regulator? Tally is a family-owned privately held company while Dvara is owned by the Dvara Trust. In both cases, if a need for large capital infusion arises then the potential source of the money comes into question. Also, complying with the regulatory requirements on capital structure could also be challenging in future. 

Overall, it sends out a loud and clear message that banking as a business is coveted and not for all. As much as there is a constant canvassing to get more banks to deepen financial inclusion, the theory has been set aside by the regulator on several occasions. In fact, in a recent interview to businessline, former RBI governor Dr D Subbarao said that the country needs more banking than banks. The regulator’s actions lately are validating his statement. 

However, a newer problem that has arisen is that every bank is beginning to look the same — rolling out the same products to the same customer segment. Understandably, the fear of missing out is driving the replication. Even those that set up shop in the last 15 years are no different. What the industry needs is innovation in terms of products and focus markets. At present, many aren’t willing to walk a new path. 

Is that going to be the RBI’s bigger worry in the next 12–24 months?