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Small Finance Bank
To understand SFBs, have to study the predecessors. To meet requirements of small customers, especially rural & semi-urban areas, RBI had been encouraging institutions like:
Urban Co-operative Bank (UCB)
Regional Rural Bank (RRB)
Local Area Bank (LAB)
Thread. https://twitter.com/deepakvenkatesh/status/1347890756313247748
To understand SFBs, have to study the predecessors. To meet requirements of small customers, especially rural & semi-urban areas, RBI had been encouraging institutions like:
Urban Co-operative Bank (UCB)
Regional Rural Bank (RRB)
Local Area Bank (LAB)
Thread. https://twitter.com/deepakvenkatesh/status/1347890756313247748
All of them have been suffering from structural weaknesses & there was a need for a new prototype to extend financial services to rural mass.
The issues were:
Lack of Private Ownership (skin in the game)
Lack of Professional Management (expertise)
Absence of Technology
Prudence
The issues were:
Lack of Private Ownership (skin in the game)
Lack of Professional Management (expertise)
Absence of Technology
Prudence
In RBI’s 2013 paper, one of the observations was that in India, where extending banking services to the underserved and unserved sections of the population is a challenge, there is merit in considering access to bank credit and services through expansion of small banks.
Nachiket Mor proposed 2 systems namely horizontally & vertically differentiated banking system.
HDBS – Full service bank that combines all 3 basic elements of payments, deposits and credit but is differentiated primarily on the dimension of size, geography or sectoral focus.
HDBS – Full service bank that combines all 3 basic elements of payments, deposits and credit but is differentiated primarily on the dimension of size, geography or sectoral focus.
VDBS – Specialize in one or more of the 3 basic elements. Ex – Payment Banks
11 entities received a license from RBI to start payments bank in Aug-2015, only 6 are operational today - Airtel, India Post, Fino Payments, National Securities Depository Ltd, Reliance Jio and Paytm.
11 entities received a license from RBI to start payments bank in Aug-2015, only 6 are operational today - Airtel, India Post, Fino Payments, National Securities Depository Ltd, Reliance Jio and Paytm.
Except Paytm & Fino, everyone else is in a loss.
RBI - The limited operational space of these banks, coupled with high initial costs in setting up infrastructure, implied that the initial years would be invested in expanding their customer base & they will take time to breakeven
RBI - The limited operational space of these banks, coupled with high initial costs in setting up infrastructure, implied that the initial years would be invested in expanding their customer base & they will take time to breakeven
I don't want to get into the specifics of payments bank. I will make a separate thread. But why am I even talking about them:
Sunil Mittal (Airtel) - “At some point in time, will look to get upgraded to small finance bank, which could enable lending and increase deposit sizes"
Sunil Mittal (Airtel) - “At some point in time, will look to get upgraded to small finance bank, which could enable lending and increase deposit sizes"
Back to SFBs
In the Union Budget presented in July 2014, the Finance Minister announced that:
In the Union Budget presented in July 2014, the Finance Minister announced that:
RBI released the final guidelines for SFBs in November 2014.
72 entities applied and only 10 got the approval. One more is starting operations in April 2021. It is important to understand the prior operations of these 10 entities before they converted to SFB.
One NBFC, 8 MFIs!
72 entities applied and only 10 got the approval. One more is starting operations in April 2021. It is important to understand the prior operations of these 10 entities before they converted to SFB.
One NBFC, 8 MFIs!
Primary objective:
Provision of savings vehicles;
Supply of credit to small business units; small and marginal farmers; micro & small industries; other unorganized sector entities, through high technology-low cost operations.
Promoters should have at least 10 years experience
Provision of savings vehicles;
Supply of credit to small business units; small and marginal farmers; micro & small industries; other unorganized sector entities, through high technology-low cost operations.
Promoters should have at least 10 years experience
The target market or the Total Addressable Market for SFBs
Source - Ujjivan
Caveat - Projections are based on 7.5% GDP growth
Source - Ujjivan
Caveat - Projections are based on 7.5% GDP growth
SFBs are younger brothers of UBs. In view of inherent risk, SFBs required to maintain 15% CRAR. The other differences in PSL & ticket size are to boost banking in rural areas and sectors where UBs don’t usually operate due to unit economics.
SFBs have a cap on the loan size. At least 50 per cent of its loan portfolio should constitute loans and advances of up to Rs.25 lakh. Hence, their costs are higher. They have to process a higher number of applications for same amount than regular banks.
SFBs have to establish their Branch Banking for liabilities in their initial years of operation whereas NBFCs, which only have assets, don’t have to. This results in a higher cost to income ratio for SFBs till branches’ operating leverage kicks in.
It is compensated by the fact that SFBs can take deposits & build their CASA franchises which will result in a significantly lower cost of funds when compared to NBFCs. The deposit base of SFBs is expected to further increase as and when SFBs start expanding to unserved regions.
Where SFBs lose out on cost to income ratio (which is also temporary), they make up for it in yields and the return ratios.
SFBs Geography
Ujjivan is the most diversified of the lot for which I have data. Others have concentration risk which could work in their favour like how CUB grew off Tamil Nadu.
Also the reason why we can't bracket SFBs together.
Ujjivan is the most diversified of the lot for which I have data. Others have concentration risk which could work in their favour like how CUB grew off Tamil Nadu.
Also the reason why we can't bracket SFBs together.
SFBs Loan Portfolio
Except AU, most of the SFBs were MFIs prior to getting the bank license. Naturally, their portfolios are Micro Finance heavy - unsecured loans. Ujjivan's goal is to reduce risk by having atleast 50% in secured loans.
Another reason why SFBs are not the same.
Except AU, most of the SFBs were MFIs prior to getting the bank license. Naturally, their portfolios are Micro Finance heavy - unsecured loans. Ujjivan's goal is to reduce risk by having atleast 50% in secured loans.
Another reason why SFBs are not the same.
Microfinance is small ticket (<1L) unsecured loan. Risk related to unsecured loan means high NIM and higher RoE. This higher RoE gets normalized by credit events (AP crisis, Kerala floods, Assam, Covid) where NPAs spike, eating away the excess returns generated during good times.
Having said that, one could still play SFBs which have performed well during the past credit events because of
1) higher returns
2) long runway for growth
if you get them at low prices during the same credit events.
Good business at great price.
PS - AU is different / better
1) higher returns
2) long runway for growth
if you get them at low prices during the same credit events.
Good business at great price.
PS - AU is different / better
Tagging for thoughts and opinions on why or if one should stay away from SFBs?
@deepakvenkatesh @jaganmsna @Prashanth_Krish @deepakshenoy @contrarianEPS @abhishec_s
@deepakvenkatesh @jaganmsna @Prashanth_Krish @deepakshenoy @contrarianEPS @abhishec_s
