Small Finance Bank Licences: Not the End of the Road for Non-SFB MFIs

Challenges and opportunities for transforming and non-transforming MFIs

MicroSave India Focus Note #123 presents the specific challenges that face Small Finance Banks (SFBs), and the opportunities that may emerge for non-SFB MFIs. 

In 2013, the Reserve Bank of India (RBI) constituted a committee to further the goal of financial inclusion in India. The committee recommended differential licensing in the form of two categories: i) Payments Bank, and ii) Small Finance Bank (SFB). Almost all of the bigger Non-Bank Finance Company - Microfinance Institutions (NBFC-MFIs) saw SFB status as a natural progression and applied for the licence. However, RBI has only granted "in-principle" approval to eight MFIs to set up SFBs. 

Once transformed, SFBs will enjoy better legal identity, access to public deposits and capacity to expand to varied market segments. However, it may not be the end of the road for non-SFB MFIs. The transformation phase of SFBs is likely to provide short to medium-term advantage to non-SFB MFIs, and the SFBs may face challenges in producing majestic growth numbers as funding under priority sector lending and managed loan portfolio will dry up gradually. This will be the time for non-SFB MFIs to strengthen operational processes and develop robust control structures to increase their competitive advantage. Non-SFB MFIs can also find ways to increase their market share. Some may expand through strategic tie-ups, taking up segments that SFBs may vacate and expanding their off-balance sheet portfolio.

About this Publication

By Singh, A., Singh, L. , Gor, N.