Small Bank- A New Hope for Unbanked People

A bank is an institution which is being authorized by the government to accept the deposits from public and lend money. For the common people bank    means commercial bank.  Primary banking functions of the commercial banks include:

1.      Acceptance of deposits  2. Advancing loans 3. Creation of credit 4. Clearing of cheques  5. Financing foreign trade 6. Remittance of funds

Scheduled Commercial Banks in India are categorised into five different groups according to their ownership and / or nature of operation. These bank groups are:

(i) State Bank of India and its Associates,  (ii) Nationalised Banks, (iii) Regional Rural Banks, (iv) Foreign Banks and (v) Other Indian Scheduled Commercial Banks (in the private sector).

At present in India the Commercial banks comprise 27 public sector banks, 20 private, 44 foreign, 4 local area banks and 56 Regional Rural Banks.

Along with these existing banks a new feather is going to join in the Indian banking system is Small bank. The banking landscape in the country is set for a big change with the recent ‘in-principle’ approval to ten entities  by the Reserve Bank of India to float small finance banks. Eight out of 10 entities are already operating in the microfinance business, and they are stepping on to start banking operations in the next 18 months.

List of 10 Banks

Sr. No	Approval granted to	Cities
1	Au Financiers (India) Ltd	Jaipur
2	Disha Microfin Private Ltd	Jalandhar
3	Equitas Holdings P Limited	Ahmedabad
4	Equitas Holdings P Limited	Chennai
5	ESAF Microfinance and Investment Private Ltd	Chennai
6	Janalakshmi Financial Services Private Limited	Bengaluru
7	RGVN(North East) Microfinance Private Limited	Guwahati
8	Suryoday Micro Finance Private Ltd	Navi Mumbai
9	Ujjivan Financial Services Private Ltd	Bengaluru
10	Utkarsh Micro Finance Private LTd	Varanasi

Though there is a very high growth in the operation of commercial banking activities all over the country but  these growth  are mostly have been seen in the  urban areas. Still the banking scenario in the rural areas including the north eastern region are not very much satisfactory. A large portion of the population are still out of the reach of the banking services.  Looking into this as a matter of concern and realizing the urgency  the Reserve Bank of India  has started the process of giving permission  to start the small banks in the country.

A  small finance banks can undertake almost all operations of a normal commercial bank but  on a smaller scale. The purpose of the small banks will be to provide a whole suite of basic banking products such as deposits and supply of credit, but in a limited area of operation. It is also expected that the small  bank would try to increase financial inclusion by provision of savings vehicles to under-served and unserved sections of the population. The RBI clearly restricts these banks to operate in low-income segment, by stipulating that 75 per cent of the total credit extended by these banks should be given to borrowers who qualify to be in the priority sector as defined by the central bank. The small bank would  primarily be engaged  in operation concentrating  on micro, small and medium enterprises, unorganized sector entities and the lower end of the retail customer base. The maximum loan size and investment limit exposure to single/group borrowers/issuers would be restricted to 15 per cent of capital funds.  Further, in order to ensure that the bank extends loans primarily to small borrowers, at least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs 25 lakh. For the first three years, 25 per cent of branches should be in unbanked rural areas. As a result the small bank are being  forced to operate among low-income segments and not chase big corporate borrowers. After the initial stabilisation period of five years, and after a review, the RBI may liberalise the scope of activities for Small Banks.

  The new  strategy of banking operation are being  expected to give a major boost towards financial inclusion and credit expansion to unbanked areas.This expectation is based on the reason that out of the 10 entities permitted eight are already in the micro finance sector. So they are well-familiar with the nuances of banking with the poor borrowers.  Till now they were  not allowed to accept deposits and engaged in extending credit after sourcing money from commercial banks. After getting access to banking, these entities can accept public deposits  resulting  into  lower their cost of borrowing and enable them bring down their rate of interest on loans from the current 24-26 per cent to a lower double digit figures.

The north-eastern region which offer a natural habitat for small banks because of under-penetration of formal banking in these regions. Where the majority areas are in hilly region the banking scenario in these regions are very poor would be benefitted by the small bank operation.It is a good news that RGVN which have been working in the region being permitted to operate as small bank. It has a good experience of the region as well as the knowledge of the target group also.

Hope the objective of providing the banking services affordable to unbanked people in the country would be fulfilled by the small bank and would  contribute  towards the growth of the economy in future.