India’s first small finance bank

Capital Small Finance Bank (SFB) was launched this Sunday (April 24, 2016) with much fanfare. This is the first of the ten small finance banks to become operational. The SFBs had received in principle approval from RBI last fiscal to start operations.

Capital SFB, earlier known as Capital Local Area Bank, was operational in 5 districts (regions) of Punjab (a northern state in India) with 47 branches. The transition from a local bank to a small finance bank is expected to help Capital expand its operations into other states of India. SFBs are required by the country’s central banker- the Reserve Bank of India (RBI) to lend at least 50% of their loan books to under Rs. 25 Lakh (USD 37,500) loans. The SFBs will have to ensure priority sector lending at 75% of loan books.

It is expected that with the operationalization of SFBs, India will inch closer to improving its bank branch penetration in the country. In turn, this is expected to improve access to financial services for India’s largely under-banked population. India, currently has 7 bank branches for every 100,000 individuals. This is significantly less than the developed world’s average of 40 bank branch for every 100,000 individuals. Access is likely to impact to financial inclusion agenda of the current dispensation more favorably.

However, the SFBs need to be wary of falling to the trap of emulating big commercial banks. The market expects differentiated positioning, distinctive products and dimensioned service experience from the SFBs. The mid market is a huge opportunity in a country with a large base of the pyramid. The SFBs will need to evolve distinctive models for servicing this opportunity profitably and meaningfully.

While there is optimism in the air, caution needs to be exercised, given the likelihood that in the coming years there will be a slugfest between the technology enabled payments banks, the commercial banks, regional rural banks, cooperative banks and now SFBs in the country- all vying for the bottom of the pyramid. Besides these, new models driven by fintechs will also pose a challenge to market share and profitability. SFBs need to ensure that they get there before the others do.