Private Boot-Strap Banking:Start For Small Banks

Private Boot-Strap Banking: Start For Small Banks

Here comes 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 .

But 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.

The loan sizes here are intended to be about Rs. 25 lakhs each for at least 50% of the bank’s portfolio, though the rest can be larger. The promoters can start with owning 100%, but need to bring their equity down gradually to 40% by year five, and 26% by year 12, per the RBI guidelines.

FDI investment is permitted, up to 49% automatically, and 74% after approval, but they need to get in at the start, as none other than the promoters can own more than 10%.

Minimum net worth required is Rs. 100 crores, and since prior experience, in local banking of 10 years, is required, you need to be an existing entity, with a profile to match.

Of course, much bigger fish want to start small banks too, but the RBI will proceed cautiously. It sees small and payment banks as ‘niche’ operations for now. It has licensed 2 new full service banks, 11 payment banks, and 10 small banks over 2014 and 2015, to kick off.

To answer sceptics, yes, it will be difficult to avoid infiltration and proxy controls via a juggling of shareholding. But extending credit to large numbers 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.

Now, the very first small bank, the Jalandar based Capital Small Finance Bank Limited (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 grow to 216 branches and spread to other states.

As a local bank, it has a turnover of Rs. 3,000 crores, with a profit of Rs. 16 crores, and a net worth of Rs. 116.68 crores. It wants to grow its top-line four-fold, to Rs. 11,800 crores by March 2021.

Informal but usurious micro-financing, the village money-lender, larger straight-up chit funds, 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 to a scale, from mere thousands, to much more, but mostly in cash, both ways.  And this, often to people at the bottom of the pyramid, with no influence and collateral, principally on trust, and the strength of their network.

The present large banking landscape has the PSU banks controlling 77% of badly distressed loan portfolios, with just 36% of the market capitalisation. The situation involves politicians, bankers and influential businessmen, rather than viability. This will have to change.

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 February 10^th, 2016.

Then, recently, the linking, by law, of bio-metric Aadhar 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 are some steps up the economic ladder, to be followed by the payment banks, in collaboration with post offices, major mobile telephony providers, supermarkets etc.

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 space.

Will this new initiative work any better in this environment? It will certainly bring millions of the unbanked into the mainstream. As for the skulduggery, private capital at risk, plus competition, will check dishonesty, better than just regulatory supervision ever can.

For: The Quint

(705 words)

April 11^th, 2016

Gautam Mukherjee