Small Finance Banks In India: A Different League

Small Finance Banks: Jharkhand’s Dumka is writing an interesting tale for the rest of the globe. For centuries, women in this indigenous village have already been crafting bamboo & water hyacinth crafts. The task necessitates specialised skills, yet they were just needed to make up the shortfall. That is no longer the case.

When ESAF Small Finance Bank came out to all of them and provided loans to help them grow their business, their lives were changed forever. They now sell to Ikea, a Swedish home furnishings business that offers its products worldwide. Women that used to earn around $50 per day now make $8,000 each month.

After all, wealth creation is more than just creating bank balances and facilities in rural areas. It’s also about establishing an environment conducive to job creation so that people may begin earning and saving and investing. Small finance banks (SFBs), which were founded nearly a lifetime ago, are pushing this development in the nation’s most rural areas.

The Case for Investment In Small Finance Banks

According to Finance Site, rural regions account for over half of India’s Gross domestic product, but still only 9% of the banking system and 11% of savings. In 2014, the figures were significantly lower. The disparity between urban and rural India caused Raghuram Rajan’s Reserve Bank of India (RBI) to issue rules for SFB licencing.

Initially, the RBI granted ten SFB licenses to microfinance institutions, community banks, and non-banking financing organisations (NBFCs). Capital Small Finance Bank & Equitas Small Finance Bank were the first to open in 2016, with 7 more opening in 2017 and another one in 2018. The very first cooperative institution to receive an SFB registration was Shivalik Small Finance Bank. In January 2021, it started operating. Following its acquisition of Punjab & Maharashtra Co-operative Bank Ltd, the RBI gave Centrum Financial Services a preliminary licence to establish a small financing bank.

Post-Crisis Possibilities

SFBs have faced several obstacles in achieving excellence. Whenever the initial Covid-19 lockout affected commerce and collections, they had recently recovered from hyperinflation. SFBs’ asset quality deteriorated significantly in FY2021.

The condition is based on services and applications. NPAs are decreasing, while consumer spending is accelerating. “We are witnessing solid growth in SFBs, particularly the mentioned ones, as the economy improves. Their credit expansion outperforms that of the majority of the populace’s banking sector. Asset quality has deteriorated after Covid-19, but it is improving, according to Ajit Kabi, investment research analyst at LKP Investments (Financial, Banks, and NBFCs).