Six messages from RBI's nod for small finance banks

1. Roadmap for MFIs: There seems to a clear roadmap for the microfinance institutions (MFIs) to graduate. Eight out of the 10 applicants to have been granted the in-principle nod by the Reserve Bank of India (RBI) for small finance banksare MFIs. Other than Au Financiers (India) Ltd., Jaipur and Capital Local Area Bank Ltd., Jalandhar, all the others are MFIs. These are: Disha Microfin Private Ltd., Ahmedabad; Equitas Holdings P Limited, Chennai; ESAF Microfinance and Investments Private Ltd., Chennai (though it is Kerala where it is strong); Janalakshmi Financial Services Private Limited, Bangalore; RGVN (North East) Microfinance Limited, Guwahati; Suryoday Micro Finance Private Ltd., Navi Mumbai; Ujjivan Financial Services Private Ltd., Bangalore; and Utkarsh Micro Finance Private Ltd., Varanasi.

2. It's functional imperative, not regional imperative, that matters: Here is where there is a major issue with the licences. The whole point about small finance banks was financial inclusion, but none of the financially excluded geographies figure prominently. All the licences have gone to players who are from the highly served regions of South, West and North, barring RGVN from Guwahati and Utkarsh from Varanasi (the central region). Perhaps, out of the 70 total applicants (two out of the 72 withdrew later), many may not have been from the excluded regions. Plus, perhaps the emphasis is more on the functional imperative of deepening the engagement on financial inclusion in the chosen geographies.

3. Fastest growing MFIs get the nod: Fastest may not mean reckless. Some of the MFIs like Janalakshmi Financial Services, Ujjivan Financial Services, Utlkash Microfinance that have been among the fastest growing with some at 100 per cent have got the licence. It will need to be seen how they can sustain this growth as small finance banks. In fact, one critic, in a lighter vein, pointed out that "if someone is growing too fast, put them into the banking system and it will slow them down". Others argue that being a bank is bad news for an NBFC, purely from a profitability perspective. But then, as some would say "bank, like the airline industry, is an ego game".

4. Nationally spread MFI is not the same as nationally spread bank: Much depends on how this pans out but MFIs have grown fast so far because they could borrow from banks. As small finance banks, they cannot borrow from other banks and will have to lend from the deposits they generate. Look at the large advertisements and billboards put up nationally by Bandhan Bank seeking new depositors. As banks, they need to make a huge transition: make provisions for CRR (Cash Reserve Ratio), and SLR (Statutory Liquidity Ratio), and put money aside for agriculture loans. Today, as MFIs, with their weekly micro loan lending, they do rural but not necessarily agri lending. They will need to do that, too.

5. Investment thesis validation for early investors: Two individuals, Vineet Rai and S. Viswanatha Prasad, would be the happiest men. Five of the 10 entities granted approval for small finance banks are their portfolio companies. Vineet Rai is the Founder and Managing Director of Aavishkaar Venture Management Services, which has Equitas, Utkarsh and Suryoday as the portfolio companies. And Prasad is the Managing Director of Caspian Impact Investment Adviser with Equitas, Ujjivan and Janalakshmi as the portfolio companies. Rai, who first invested Rs 6 crore in Equitas around January 2009, after which Equitas began building its portfolio, feels validated since the companies have emerged among the top 10 and "is an endorsement of the incredible work done by the promoters of these entities". Going forward, he says, "our job is to help and assist the companies move in the right direction and our role going forward will be to do what it will take to make the banks successful and will therefore play any role that the promoter expects us to play." Surely, with the profile of these portfolio companies raised significantly, even an exit would be a decent one for these investors.

6. Next 18 months crucial: Within the next 18 months, these entities will have to make the transition and get the required domestic investors for as the RBI says: "The 'in-principle' approval granted will be valid for 18 months to enable the applicants to comply with the requirements under the Guidelines and fulfil other conditions as may be stipulated by the RBI. On being satisfied that the applicants have complied with the requisite conditions laid down by it as part of 'in-principle' approval, the RBI would consider granting them a licence for commencement of banking business under Section 22(1) of the Banking Regulation Act, 1949. Until a regular licence is issued, the applicants cannot undertake any banking business."