A new bank license has been issued after a gap of nearly 6 years. The Reserve Bank of India issued a small finance bank (SFB) license to a consortium of Fintech Company BharatPe and Centrum Financial Services Ltd. The new business entity Unity Small Finance Bank will see Centrum’s MSME and micro finance businesses merged into itself.
Let’s understand what Small Finance Bank is
Smallfinance banks are a type of niche banks in India. Banks with a small finance bank license can provide basic banking service of acceptance of deposits and lending. The aim behind these is to provide financial inclusion to sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganized sector entities. The small finance bank shall be registered as a public limited company under the Companies Act, 2013. It will be licensed under Section 22 of the Banking Regulation Act, 1949 and governed by the provisions of the Banking Regulation Act, 1949; Reserve Bank of India Act, 1934; Foreign Exchange Management Act, 1999; Payment and Settlement Systems Act, 2007; Credit Information Companies (Regulation) Act, 2005; Deposit Insurance and Credit Guarantee Corporation Act, 1961; other relevant Statutes and the Directives, Prudential Regulations and other Guidelines/Instructions issued by RBI and other regulators from time to time. The small finance banks will be given scheduled bank status once they commence their operations, and found suitable as per Section 42 (6) (a) of the Reserve Bank of India Act, 1934
The objectives of setting up of small finance banks will be for furthering financial inclusion by (i) provision of savings vehicles primarily to unserved and underserved sections of the population, and (ii) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, through high technology-low cost operations
Motives behind setting up of this Small Finance Bank
The RBI had already given an in-principle approval to Centrum Financial Services to set up a small finance bank, and along with BharatPe, it took over the Punjab and Maharashtra Co-operative Bank, the assets and liabilities of which will be taken over by the new entity. Both Centrum and BharatPe had aspirations to evolve their businesses into a bank and coming together of both the companies, alongside the PMC Bank crisis presented an opportunity for the two entities to join hands. Centrum’s MSME and Microfinance businesses will be merged into Unity Small Finance Bank.
“Our MSME and microfinance business will be merged with the small finance bank from day one. Then over time, we will review and implement new businesses in the bank and those new businesses can either completely start from scratch and be built originally in the bank or could be transferred from either BharatPe or Centrum’s stable”, says Jaspal Bindra, Chairman, Centrum Group.Further he added that, “We aspire to be India’s First Digital Bank and we had earlier stated that between Centrum and BharatPe, we are committing to a capital of Rs 1,800 crore against regulatory requirements of Rs 200 crore. We wanted to be abundantly capitalized. Today I am happy to reconfirm that Rs 1,800 crore is the minimum that we will bring in at the commencement of business. It will be higher than Rs 1,800 crore.”
There have been several examples of small finance banks and non-banking financial companies collaborating with fintech companies. This has particularly gained momentum in the buy-now-pay-later (BNPL) and the micro-lending models, where companies like Paytm, Google Pay, Amazon Pay, etc have partnered with NBFCs to assess creditworthiness of an existing customer and present it to the lender as a potential borrower.
For BharatPe, on the other hand, an SFB licence means it could expand its lending portfolio. The startup already processes around $4 billion worth of transactions on its platform annually, and it had been planning to offer its customers — primarily small and medium sized merchants — a bank account and lending services based on their transactions.
Small Finance Bank Market Opportunity
“Accumulated assets under management (AUM) growth of 48% between FY18-December 2020 for SFBs vs 7% systemic credit growth speaks of SFBs’ ability to carve a niche in the small-ticket lending space. Its market share in small loans remains as high as 6% vs 1% total credit market share as of December 2020,”
India’s small finance banks are expected to dominate the small-ticket lending space. The Indian Microfinance Market is anticipated to grow at a brisk CAGR of more than 40% through 2025, predominantly on account of increasing demand for microfinance loans from the MSME sector.
In India, there are several BNPL wallets that are prevalent on e-commerce, grocery, and food delivery platforms. These include PayU-run LazyPay, Simpl, Zest Money, Amazon Pay, Paytm Postpaid, in addition to several pay later services being offered by banks such as ICICI Bank, etc. Goldman Sachs has predicted that BNPL will rise to become the fastest growing online payment option with its market share growing from 3% now to 9% in 2024.
