servi?e a?tivities. — 75% of its Adjusted

servi?e a?tivities.

— 75% of its Adjusted Net Bank ?redit
(ANB?) should be advan?ed to the priority se?tor as ?ategorized by RBI.

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— Maximum loan size to a single person ?annot
ex?eed 10% of total ?apital funds; ?annot ex?eed 15% in the ?ase of a group.

— At least 50% of its loans should ?onstitute
loans and advan?es of up to 25 lakh.

— Small banks ?an undertake finan?ial
servi?es like distribution of mutual fund units, insuran?e produ?ts, pension
produ?ts, and so on, but not without prior approval from the RBI.

— Small finan?e banks will be subje?t to
all prudential norms and regulations of the RBI as appli?able to existing ?ommer?ial
banks. This will in?lude maintaining ?ash reserve ratio (?RR) or the per?entage
of deposits that must be kept aside as a reserve; and statutory liquid ratio
(SLR) or the per?entage of deposits that must be invested in government se?urities.

— Minimum paid-up equity ?apital
requirement of Rs 100 ?rore.

— The promoter’s minimum initial ?ontribution
to the paid-up equity ?apital of su?h small finan?e bank shall at least be 40%
whi?h ?an be gradually brought down to 26% within 12 years from the date of ?ommen?ement
of operations.

— A small bank ?an transform into a
full-fledged bank, but only after RBI’s approval.

— A fundamental requirement is that it
must have 25% of its bran?hes set up in unbanked areas.



The obje?tives of setting up of small finan?e
banks will be to further finan?ial in?lusion by

provision of
savings vehi?les, and

Supply of ?redit
to small business units; small and marginal farmers; mi?ro and small
industries; and other unorganised se?tor entities, through high te?hnology-low ?ost


Problems fa?ed by Small Finan?e Banks:-

– It’s a new ?on?ept and still in development

– Stri?ter rules and regulations.

– Heavy Investment on te?hnology.

– Stri?t ?RR and SLR poli?ies.

– Demonetization.

– Edu?ating the prospe?tive ?ustomer thee
differentiation between SFBs and other NBF?s.


Why Small Finan?e Banks:-

Small Finan?e Banks have been a great
phenomenon for the Indian finan?ial system spe?ially the priority se?tor whi?h
has a huge potential for the growth of entrepreneurial ventures. Small finan?e
banks were introdu?ed in the Indian Finan?ial system to redu?e the amount of
unbanked population in the ?ountry. As of 2014, around 19% of the population in
India was still unbanked due to differen?e reasons su?h as:-

Insuffi?ient ?apital

Inadequate savings among the small

La?k of in?lusion strategies among the
finan?ial institutions.

Therefore in order to improve the ratio of
unbanked to banked people, RBI and the government issued a notifi?ation
regarding the introdu?tion of small finan?e banks and these banks ?ame into
existen?e in November 2014.

Su??ess Rate of Small Finan?e Banks:-

As explained above the Small Finan?e Banks
are of a great use to the poor and unbanked population of the ?ompany.
Therefore, the su??ess rate of these banks should be ?al?ulated in order to
assess the overall working of these banks. If there are any misappropriations,
non-?omplian?e or improper fun?tioning of these banks, then that will be
explained in the paper and measures to over?ome these short?omings will be


In order to assess the working of the
small finan?e banks and their su??ess, I ought to use the data provided by the ?ompany

Performan?e of Small Finan?e Banks:-

All the 10 small finan?e banks that have got the
in-prin?iple li?en?e from the Reserve Bank of India (RBI) are now armed with
the regulator’s final nod; eight of them are up and running. How have they been

Two in the lot—Equitas Small Finan?e Bank Ltd and
Ujjivan Small Finan?e Bank Ltd—are part of listed entities; their finan?ials
are in the publi? domain. I ?aught up with R. Baskar Babu, one of the founders
of New Mumbai-based Suryoday Small Finan?e Bank Ltd. It started operations on
23 January, the same day its peer Utkarsh Small Finan?e Bank was laun?hed in
another part of India, Varanasi. These two are not the last ones to take off.
ESAF Small Finan?e Bank Ltd, Kerala’s first private bank after Independen?e,
took off on 17 Mar?h in Thrissur; it has already grabbed some Rs350 ?rore

In ?omparison, Suryoday’s deposit mobilization is
at Rs35 ?rore. It is fo?ussing on retail deposits. The bank has plenty of money
in its vault and wants to play safe during the transition from a mi?rofinan?e
institution (MFI) to its ?urrent avatar. Eight of the small finan?e banks were
MFIs, while one was a lo?al area bank and another a non-banking finan?ial ?ompany.

Every senior exe?utive of Suryoday, in?luding Babu,
has taken responsibility for raising retail deposits from their friends, a?quaintan?es
and relatives besides existing borrowers. Babu has set a Rs25 ?rore target for
himself. It is offering 9% interest on retail fixed deposits for one-two years
and 0.75% more for senior ?itizens; the rate of bulk deposits is lower. Its
savings bank rate is 6.25% for below Rs1 lakh, and 7.25% for more than Rs1 lakh
up to Rs10 lakh.

Small banks are not worried about deposit ?olle?tion
as India’s high street banks are flush with money; they are not ?hasing term
deposits as their loan books are not growing. The liquidity surge in the banking
system follows the so-?alled demonetization exer?ise in November-De?ember when
India’s ?entral bank withdrew 86% of the ?urren?y in ?ir?ulation, leading to a
mad rush by ?itizens to return old high-value ?urren?y notes to banks.

While all small finan?e banks are thanking the
demonetization move for the relative ease in ?olle?ting deposits, they blame it
for the sudden deterioration in their asset quality. Suryoday, whi?h had 0.15%
bad assets, is now saddled with around 6% gross non-performing assets or NPAs;
after setting aside money, its net NPAs are 4.5% as ?ash-strapped borrowers are
refusing to pay. Farm loan waivers by a few Indian states and the noise in the
politi?al ?ir?les for su?h waivers in other states are also vitiating the
atmosphere. Suryoday’s loan book has redu?ed from Rs1,100 ?rore to Rs1,000 as
it is sele?tive in giving loans in affe?ted geographies.

The system of most small finan?e banks probably is
not equipped to handle the sudden surge in NPAs. To put things in perspe?tive,
typi?ally, small loans are ?olle?ted in group meetings. If an hour is allotted
for su?h a meeting for 20 borrowers, it ?an probably have time to dis?uss one
defaulter but if there are four defaulters, there isn’t enough time to dis?uss
their issues and ?hase them as that delays the next meeting and the entire ?hain
of meetings gets disrupted.

For mi?rofinan?e institutions and small finan?e
banks, ta?kling delinquen?y is more a pro?edural issue and te?hnology, however
smart, is of little help. Under regulation, 75% of small banks’ loans must be
disbursed to weaker se?tions of so?iety and other target segments under the so-?alled
priority se?tor tag (for universal banks it is 40%) and up to Rs10 lakh of su?h
loans do not need to be ba?ked by any ?ollateral se?urity.

The average size of Suryoday’s outstanding mi?rofinan?e
loans is Rs12,500 and average disbursement is Rs30,000. It started with one
bank bran?h and 220 doorstep servi?e ?entres (the bran?hes of the mi?rofinan?e
entity); sin?e laun?h, it has ramped up the bran?h network to 11, in west and
south India. Babu is more ?omfortable with the smaller format of bran?hes and
wants to ?onvert the ?urrent mi?rofinan?e bran?hes into bank bran?hes as the
running ?ost of su?h a bran?h is Rs2-Rs.2.5 lakh a month, one-fifth of a
regular bank bran?h in a metro; the ?ost ?ould be even higher for a larger
format bran?h. The last RBI guidelines have allowed small finan?e banks to ?ontinue
with su?h servi?e ?entres for three years.

What are the ?hallenges before a small finan?e

Te?hnology, a??ording to Babu, is not the biggest ?hallenge
as it’s not diffi?ult to a??ess quality systems. Human resour?es is probably a
relatively bigger ?hange. Suryoday has in?reased its workfor?e from 1,700 to
2,200 in the run-up to its laun?h. It has hired people from India’s new private
banks. At the top tier, there are 10 exe?utives—eight of them joined in the
last 21 months during the transition and rollout phase. The bank has given sto?k
options to 200 employees and plans to extend it to around 800.

Initially, all bank bran?hes are being run by
managers with banking experien?e but the next set of bran?h managers will be
hired as well as groomed from among the MFI employees. At the junior level, the
salary range for bran?h banking staff is around 25% more than the MFI field
employees. Babu says this gap will narrow and probably disappear over a period
of time.

An even bigger ?hallenge is ?omplian?e with RBI
norms— quite logi?al when one migrates from light-tou?h regulation to a highly
regulated arena. All small finan?e banks are employing ?onsulting firms and
former bankers to handhold them on the tri?ky path of ?omplian?e, but most do
not fully know what they are supposed to do to ensure that they are fully ?ompliant.
It’s a sort of bla?k box for them. Issues su?h as internal audit, ?yber se?urity
and overall ?omplian?e are taking a lot of management bandwidth.

The biggest ?hallenge, for many, is how to delegate
responsibilities to the exe?utives below the line. For most small finan?e
banks—not all—the promoters/founders are at the driver’s seat as managing dire?tors
and ?hief exe?utives, and it is not easy to delegate effe?tively, ensuring
adequate ?ontrols. A few of them have done it. They are fo?ussing more on
strategies and marketing the bank instead of getting bogged down by day-to-day

With a Rs500 ?rore net worth and a Rs1,000 ?rore
loan book, Suryoday’s leverage is low. It ?harges 23% interest on small unse?ured
loans whi?h ?onstitute 98% of its loan book; the remaining 2% are loans against
property or LAP (Rs3-5 lakh) and loans given to shopkeepers (Rs2-5 lakh).

The plan is to bring down the interest rate with
the rise in deposit portfolio (the average ?ost of deposits is 9% Vs 12% on
bank loans whi?h it was taking as an MFI). It also plans to fo?us more on loans
against property, loans to shopkeepers and loans for low-?ost housing to bring
down the portion of unse?ured loans and ensure that a range of produ?ts are
available as ?ustomers graduate from group loans.

At the end of the first year of operations,
Suryoday aims to ?olle?t Rs750 ?rore deposits, disburse Rs1,800 ?rore loans,
have 90 bank bran?hes with a total of 3,000 employees and double its ?ustomer
base from 750,000 to 1.5 million. Babu believes that the opportunity is huge
and profitability ?an be sustained if the bank ?an meet other finan?ial needs
of its ?ustomers, beyond loans. He is investing in analyti?s to figure out what
the ?ustomers want and prepare new produ?ts for them.

Suryoday’s aspiration is in line with all other
small finan?e banks who are dreaming big. If politi?ians stop spoiling the ?redit
?ulture, ?lamouring for loan waivers, the small finan?e banks ?an ?hange
India’s banking lands?ape. Rise in bad loans ?an ?rash many dreams.