Small Finance Banks and Payment Banks

An Incomplete Metamorphosis?


The Reserve Bank of India (RBI) issued guidelines on 27th November, 2014 for setting up two categories of ‘Differentiated Banks’ with the explicit mandate to further ‘financial inclusion’ in the country: (a) Small Finance Banks (SFBs) that would focus on providing savings vehicles as well as loans to small and marginal farmers, micro and small industries, etc. and (b) Payment Banks (PBs) that would provide small savings account as well as payment and remittance services, specifically to migrant labour, low income households, small businesses, etc. Both categories of banks have been mandated to use high tech low cost operations in the conduct of their business. Between April 2016 and March 2018 ten entities who had been granted SFB license by the RBI have commenced operations and have demonstrated varying degrees of success in their business operations. On the other hand, of the 11 Payment Bank licenses granted by RBI, three surrendered their license prior to commencing operations and two have since closed down. We evaluate the pedigree and growth of both SFBs and PBs to date and asses their future trajectory using the biological theory of ‘metamorphosis’. We argue, based on secondary data to date that the SFBs would be compelled, for financial and profitability reasons, to grow up to be like any other commercial bank in the country (incomplete metamorphosis). On the other hand, the success rate of the PBs has been very low and profitability has been a serious issue, primarily due to stringent legal and regulatory compliance requirements. PBs continue to suffer from the fear of an ‘unsustainable’ business model and could encounter ‘early mortality’ or be merged with other commercial banks. RBI’s decision to suspend any more PB Licenses seems to point in that direction.

P C Narayan

Professor P.C. Narayan is a Professor at Indian Institute of Management (IIM) Bangalore. His current research interests include financial risk management, issues of solvency and liquidity in banking and financial markets, cross-border capital flows involving emerging markets and financial inclusion including micro-finance.