Small, and payments banks, will reinforce this
RBI’s guidelines for small finance banks are less onerous than the draft rules, which is probably why a couple of microfinance institutions (MFIs) and non-banking financial companies (NBFCs) are already at work on their spreadsheets. While the prospect of being able to mobilise deposits must be tempting, especially for an MFI because it would bring down the cost of funds dramatically once there is a reasonable-sized base of current and savings accounts, some of the savings will be lost in meeting the cash reserve ratio and the statutory liquidity ratio norms. In the initial years, therefore, the returns will be slightly lower but that’s the cost of being in business.
Indeed, while there are no geographical restrictions on where the bank can set up shop, it’s not going to be easy for a new entity to build a loan portfolio in an unbanked or even under-banked region; an MFI should have less trouble scaling up since it would be more familiar with the territory and customers. They would have no trouble ensuring that three-fourths of the net credit comprises priority sector loans; where large banks have found lending to farmers a risky proposition—SBI has a high level of non-performing assets—and NBFCs too may take time to get a handle on the business, MFIs should find the going relatively easy. Since many MFIs have followed the self-help group model targeting women as borrowers to ensure that repayments are regular, they may stay with that approach.
To that extent, the cap on the ticket size of R25 lakh, for 50% of the loans, might be irrelevant because the average ticket size could end up being much smaller. The guidelines, therefore, seem aimed at helping MFIs to graduate to banks and the central bank should get a good number of applications. The dream of becoming a universal bank at a later stage—a la Bandhan—would egg them on. Indeed, given how banks will be focusing on financial inclusion for the next decade at least, a sound business can fetch the promoter a handsome valuation in an M&A transaction. Indeed, with millions unlikely to get access to formal banking, there’s potential for payments banks as the growing value of transactions through m-wallet, which has more than tripled in the last two years to R2,750 crore, indicates. The majority of these transactions were remittances but by providing customers with more services, telecom operators can reduce the churn, in the process earning additional revenues. That way they would leverage their large distribution networks, including those in rural India, more effectively. However, revenues from the payments bank business are likely to be paltry—CRISIL estimates that even after years the contribution to their total revenues is likely to be less than 1%. Moreover, payments banks are likely to have less than 0.5% of the total CASA. Perhaps some of them will want to team up with a bank to spare themselves the challenge of cash management, though it’s not clear whether banks bring much else to the table.