NEW IDEAS GET THE GREEN LIGHT.
Just when de-monetization and GST schemes are in use as armament by the opposing India National Congress and other detractors of the ruling Bhartiya Janta Party,let’s look at some efforts which are being ignored in this political scenario, a little positivity is enough to cheer you up. On, Spetember 16, 2015, the Reserve Bank of India (India’s central banking institution) gave in-principle approval to 10 entities to set up small finance banks. The entities were given 18 months to adhere to the guidelines provided by the Bank.
Out of the 10 entities, 8 are Micro Finance institutions (MFI), 1 is a local area bank and 1 is a Non-Banking financial company. 8 entities being MFI is an indicatorof contribution by the Micro Finance industry to the financial sector. One may wonder, what the difference between MFI and Small finance banks is, they may sound similar. If we scrutinize the distinctness between the two, we can infer the following; SFB’s can take deposits, MFI’s cannot, SFB’s take part in payment system, which is not practiced by MFI’s,for a NBFC MFI the paid up capital requirement is INR 5 Cr while it is INR 100 Cr for a SFB. The SFB’s can also be confused with the payments bank, another move by the RBI to help the rural sector. Though some functions of SFB’s are similar to those of payments bank, there are some notable differences between the two.
|Payments Bank||Small Finance Banks|
|· Card Issuers, finance companies, business correspondents, telecom companies.||· Eligibility: Professionals with 10 years of experience or promoter group with 5 year track record.|
|· Can open small savings accounts||· Can finance SME, rural, low income sectors.|
|· Can’t lend in any form||· Can lend in any form.|
|· Deposits can be upto INR 1 lac.||· Deposits upto any amount|
|· No authority to issue credit cards||· Authority to provide credit cards|
|· Can’t provide remittance services||· Can provide remittance services|
|· Promoter should retain the stake of 40% for at least 5 years.||· Promoter’s initial contribution be 40% which should reduce to 26% in 12 yeras|
As per the RBI guidelines, SFB’s will offer basic banking services to promote financial inclusion. The SFB’s will be spread in the rural and semi-urban areas. The move tends to bring down the 24%-26% per annum on loans charged by the MFI. RBI wants the SFB’s to 75% of their total credit to borrowers who qualify as priority sector defined by the Bank. The private sector definition refers to the agriculture sector, SME, and low-income earners. Interesting fact, the commercial banks have to lend only 40% of their total credit borrowers. The move tends to develope saving habits among the low-income household.
WHAT’S THE NEED?
India is expected to be one of the leaders in the economic sector. To fulfill the expectations it needs to work towards it. The agriculture and the SME sector will play a vital part if India is to fulfill the expectations. Over 58% of the Indian rural households depend on the agricultural sector. It employs 50% of the workforce of the country. The SME sector is the backbone of the Indian economy. It creates 80% of the jobs in India, and of those, 65% of the jobs are created by the micro industries. They make up 45% of India’s GDP, 3 times what the corporate sector contributes.
The data is enough to suggest that why both the sectors need special attention if India wants to be lead the global economy. Proposed by the Nachiket More Committee constituted by the ex-governor of RBI, Dr. Raghuram Rajan, the SFB’s are here to improve the saving habits among the low-income households. The banks will also provide loans to the low-income sectors and even the unorganized sector. In a country, where rural people make up 66.68% of the population, SFB’s will be a very important tool to lift the economy.
The RBI guidelines have strictly defined the target groups. The target segment will need small loans that being the case, there will be roll-out of many small loans to the low-income groups. The banks will provide special attention to the needs of the low-income group. They know what is required to improve the economy of the section and are in pole position to bring a change and change the dynamics of the rural banking sector. During an interview with The Hindu (Indian daily) K.Paul Thomas, founder and Chairman, ESAF microfinance stated that ‘Universal banks are not in the position to understand the needs of small-value customers’. Though small finance banks don’t get the hype of the universal banks and the media attention of theirs, they are vital to the economy, even the prominent names in the field reckon.“We combine the virtues of both co-operative banks and universal banks: the local connect of cooperative banks and technological might of universal banks will reflect in SFBs”, said Thomas citing the difference between his product and the other products in the Indian banking sector. As on March 2017, 5 banks are already functioning and ESAF will be the 6th to start its operations in the sector.