RBI’s Differentiated Banking Strategy Starts Paying Off: Study

The differentiated banking approach introduced by the Reserve Bank of India in 2014 with the introduction of small finance and payments banks has started paying off.

Small finance banks have managed to stick to their stated objective of improving financial inclusion by lending more to micro, small and medium enterprises, according to a study by Richa Saraf and Pallavi Chavan from the RBI’s Department of Supervision. Small finance banks have rapidly grown their assets and liabilities in the last three financial years, it said.

The study, published in the RBI’s monthly bulletin on Thursday, looked at the business of small finance banks between financial years 2017-18 and 2019-20. Their assets have grown 150% annually during the period, according to the study. That, however, came on a low base and this category contributed 0.4% of the total loan assets as of March 2020.

The growth in assets was largely supported by agriculture, trade and professional services segments. These three sectors accounted for about 65% of the total credit of small finance banks as of March 2020.

“Considering that SFBs, by design, were expected to extend small-sized loans, it may not be wrong to assume that they financed small agriculturists, small traders and small businesses,” Saraf and Chavan said.

Granular Asset Growth, But Deposits Lag

A large portion of the loan books of these banks were focused on priority sector lending, as is the RBI’s guidance to them. About 60% of all small finance banks had a priority sector lending portfolio of more than over 75%. The lending to this segment constituted 50-75% for the remaining banks.

The small finance bank licensing guidelines require at least 75% of the adjusted net banking credit to be in the priority sector compared to 40% for universal banks.

99.99% of the total loan accounts and 83% of the total loan amount was towards loans with a credit limit up to Rs 25 lakh. Within this, a large portion of the loans were to customers with a credit limit of Rs 2 lakh or below.

RBI guidelines specify that small finance banks must have at least 50% of their loan book in the Rs 25-lakh category.

Small finance banks have also seen a rapid rise in their deposit base over the last three financial years. According to Saraf and Chavan, since microfinance institutions were largely the entities which converted to small finance banks, their focus has been to get access to cheaper funding by raising deposits.

That, however, hasn't given the small finance banks access to the current account-savings account space yet. According to the study, the share of CASA ratio to the total deposit base of small finance banks was at 15% as of March 2020 compared to 41% for scheduled commercial banks.

Expansion Of Branches

According to data quoted in the study, the total number of small finance bank branches in the country touched 4,307 as of March 2020. However, these banks may need a better strategy to grow their network to penetrate underserved areas.

Most of the branches opened by small finance banks are in states like Tamil Nadu, Maharashtra, Karnataka, Kerala and Punjab, which have a much lower population per bank branch than the national average.

Small finance bank branches also display concentration in the urban and semi-urban centres--tier 1 to 3 centres having population of 20,000 persons and above, the study noted. About 65% of the total branches were concentrated in urban and semi-urban centres.

Only three small finance banks had more than 25% of their branches in rural areas. Tier 5-6 (rural) centres with population of less than 10,000 persons accounted for only about 18% of the SFB branches in March 2020.