India’s First Small Bank: Private Bootstrap Banking & Challenges
Here’s the latest instalment in the effort to include the financially invisible and perennially unbanked – small banks. The resultant boost – to both the ‘official economy’, and ‘white’ bank credit – at reasonable rates, can only spur GDP growth.
These small banks are aimed, not at individual women entrepreneurs at the absolute grassroots level – like in the Grameen Bank of Bangladesh – but established small traders, service providers, micro and SMEs, the massive unorganised sector, and small farmers.
Fresh Start with Small Finance Banks
The loan sizes here are intended to be about Rs 25 lakh each for at least 50 percent of the bank’s portfolio, though the rest can be larger. The promoters can start with owning 100 percent, but need to bring their equity down gradually to 40 percent by the fifth year, and 26 percent by the twelfth year, as per RBI guidelines.
FDI investment is permitted, up to 49 percent automatically, and 74 percent after approval, but they need to get in at the start, as no entity other than promoters can own more than 10 percent.
Minimum net worth required is Rs 100 crore, and since prior experience, in local banking of 10 years, is required, you need to be an existing entity, with a profile to match.
To answer sceptics, yes, it will be difficult to
avoid infiltration and proxy controls via a juggle of shareholding. But
extending credit to large number of productive and responsible people, is worth
taking the risk. Besides, the classic solution to monopolistic practice, and
even efficiency, is privatisation and competition. You cannot grow an economy
if there is no access to enabling funds.
First Local Bank Starts Operation
- Jalandhar-based Capital Local Area Bank (CLAB) set to become India’s first small area finance bank on 13 April 2016.
- RBI gave its nod to CLAB and nine other microfinance institutions on 27 November 2014.
- Loan sizes of about Rs 25 lakh each should constitute at least 50 percent of the bank’s portfolio.
- While the government’s objective is financial
inclusion, there is a possibility that small banks can turn into dreaded Ponzi schemes.
First Small Bank
Now, the very first small bank, the Jalandhar-based Capital Small Finance Bank (CSFB) is about to open on Baisakhi.
It will morph from the Capital Local Area Bank, in business for 15 years, with 700 employees, operating via 49 branches. In its small bank avatar, it hopes to expand to 216 branches and spread to other states.
As a local bank, it has a turnover of Rs 3,000 crore, with a profit of Rs 16 crore, and a net worth of Rs 116.68 crore. It wants to grow its top-line four-fold to Rs 11,800 crore by March 2021.
Objective of Financial Inclusion
Informal but usurious micro-financing, the village money-lender, larger straight-up chit funds, and vast networks of ‘para-banking’ have been working in the sub-continent for a long time. These accept tens and hundreds of rupees in deposits, and lend on a scale from mere thousands to much more, but mostly in cash, both ways. These loans often go to people at the bottom of the pyramid, with no influence and collateral, principally on trust and the strength of their network.
This latest initiative on competitive financial
inclusion comes in sequence. First came this government’s Jan Dhan Yojana,
that has enrolled 200 million hitherto ‘unbanked’ account holders, aggregating
to an impressive $4.8 billion in deposits, into the big banks, as on 10 February 2016.
Threat of Another Chit Fund Bust?
Recently, the Aadhaar Bill linked bio-metric cards to these very bank accounts belonging to the poor for the direct receipt of subsidies minus leakages en route.
And now, we have small banks to serve those who stand a few steps higher in the economic ladder. This will be followed by payment banks.
But there are large threats too. Dreaded Ponzi schemes and scandalous looting have plagued giant chit funds. Many of the cooperative banks are dodgy and self-serving, as are some in the NBFC (Non-Banking Finance Companies) space.
Will this new initiative work any better in this environment? It will certainly bring millions of unbanked into the mainstream. As for the skulduggery, private capital at risk and competition will check dishonesty better than regulatory supervision ever can.
(Gautam Mukherjee is a plugged-in commentator and instant analyser.)