Sometime in 2015, Raghuram Rajan, the then-governor of India’s central bank and regulator, the Reserve Bank of India, introduced the idea of small finance banks (SFBs). It was an attempt to take the entire suite of banking services to low-income households—the ‘small’ here referred to the kind of customer the banks would deal with.

It was a licence gold rush. Around 72 different financial institutions applied, including large microfinance institutions (MFI), local area banks and non-banking financial institutions (NBFCs), and some individuals. Only 10 got the licence.

Cut to 2021, though, and the situation couldn’t be more different. In April, the RBI received just four four Bloomberg Quint Applicants Line Up For RBI’s On-Tap Banking Licences Read more applications for this class of banks—Dvara Kshetriya Gramin Financial Services, an MFI with a loan book the size of Rs 832 crore ($113.2 million); VSoft Technologies, a banking tech company; Akhil Kumar Gupta, an executive at conglomerate Bharti Enterprises; and Calicut City Service Co-operative Bank.

Those such as Paytm Payments Bank and Airtel Payments Bank, which had earlier expressed interest in becoming SFBs, did not apply. A Chennai-based investment banker with expertise in financial services described the response and the types of applicants as “disappointing”.

The disinterest is puzzling because in four short years, the 10 licensees grew their cumulative assets to almost Rs 1,10,000 crore ($15 billion). They grew 20% year-on-year in the year ended March 2021. Deposits also grew 40% year-on-year to about Rs 85,000 crore ($11.5 billion)—0.5% of all the deposits collected in the country—while 1% of all lending in the country happened via these banks. “Their profitability is better than even large private sector banks,” says Nidesh Jain, analyst at Investec, an asset management company.

In India, banks are the symbol of ultimate trust, the only currency financial institutions thrive on. So the lack of demand for these licences—among the near top 40 NBFCs and MFIs, and over 1,500 urban cooperative banks no less—begs the question, why are more financial institutions not applying to what was supposed to be a revolution for small borrowers and savers?

One obvious reason for the poor turnout is the onslaught of Covid-19. The pandemic has kept lenders busy, trying to work out just how badly they’ve been hit. The second wave will only make things worse. The RBI has also made these licences on-tap—financials institutions can apply for them any time they want. “Scarcity creates demand. Most likely, financial institutions are waiting for external conditions to stabilise before applying,” said Jain.

But it’s not just the pandemic. There are larger, institutional problems plaguing SFBs, including their very design.

SFBs can’t afford to take deposits from their low-income customer base, so they have to compete with other banks for depositors. Trying to diversify away from microfinance loans could also impact near-term profitability.

AUTHOR

Arundhati Ramanathan

Arundhati is Bengaluru-based. She is interested in how people use money in the digital age and how new economies will take shape based on that interaction. She has spent over 10 years reporting and writing on various subjects. Previous stints were at Mint, Outlook Business and Reuters.

View Full Profile

Available exclusively to subscribers of The Ken India

This story is a part of The Ken India edition. Subscribe. Questions?

MOST POPULAR

Annual Subscription

12-month access to 200+ stories, archive of 800+ stories from our India edition. Plus our premium newsletters, Beyond The First Order and The Nutgraf worth Rs. 99/month or $2/month each for free.

Rs. 2,750

Subscribe
 

Quarterly Subscription

3-month access to 60+ new stories with 3-months worth of archives from our India edition. Plus our premium newsletters, Beyond The First Order and The Nutgraf worth Rs. 99/month or $2/month each for free.

Rs. 1,750

Subscribe
 

Single Story

Instant access to this story for a year along with comment privileges.

Rs. 500

Subscribe
MOST POPULAR

Annual Subscription

12-month access to 150+ stories from Southeast Asia.

$ 120

Subscribe
 

Quarterly Subscription

3-month access to 35+ stories from Southeast Asia.

$ 50

Subscribe
 

Single Story

Instant access to this story for a year along with comment privileges.

$ 20

Subscribe

Questions?

What is The Ken?

The Ken is a subscription-only business journalism website and app that provides coverage across two editions - India and Southeast Asia.

What kind of stories do you write?

We publish sharp, original and reported stories on technology, business and healthcare. Our stories are forward-looking, analytical and directional — supported by data, visualisations and infographics.

We use language and narrative that is accessible to even lay readers. And we optimise for quality over quantity, every single time.

What do I get if I subscribe?

For subscribers of the India edition, we publish a new story every weekday, a premium daily newsletter, Beyond The First Order and a weekly newsletter - The Nutgraf.

For subscribers of the Southeast Asia edition, we publish a new story three days a week and a weekly newsletter, Strait Up.

The annual subscription will get you complete, exclusive access to our archive of previously published stories for your edition, along with access to our subscriber-only mobile apps, our premium comment sections, our newsletter archives and several other gifts and benefits.

Do I need to pay separately for your premium newsletters?

Nope. Paid, premium subscribers of The Ken get our newsletters delivered for free.

Does a subscription to the India edition grant me access to Southeast Asia stories? Or vice-versa?

Afraid not. Each edition is separate with its own subscription plan. The India edition publishes stories focused on India. The Southeast Asia edition is focused on Southeast Asia. We may occasionally cross-publish stories from one edition to the other.

Do you offer an all-access joint subscription for both editions?

Not yet. If you’d like to access both editions, you’ll have to purchase two subscriptions separately - one for India and the other for Southeast Asia.

Do you offer any discounts?

No. We have a zero discounts policy.

Is there a free trial I can opt for?

We don’t offer any trials, but you can sign up for a free account which will give you access to the weekly free story, our archive of free stories and summaries of the paid stories. You can stay on the free account as long as you’d like.

Do you offer refunds?

We allow you to sample our journalism for free before signing up, and after you do, we stand by its quality. But we do not offer refunds.

I am facing some trouble purchasing a subscription. What can I do?

Please write to us at [email protected] detailing the error or queries.