A Critique of Small Finance Bank Model of Financial Inclusion in India.

Abstract

Though Economic theorists are divided on the matter of whether the economy needs large number of small banks or small number of large banks, the central bank of India granted licenses to small banks in a mission to further financial inclusion. In this research, we look at the business of a Small Finance Bank (SFB) in the context of its mandate to offer banking services to the underserved and unbanked. We begin with tracing the developments which lead to the policy decision, and later the financial inclusion landscape of India through the lenses of savings, credit for agriculture and micro enterprises. It is found that there hasn’t been significant growth in credit offering to micro enterprises, and that the small farmers are being deprived of access to credit from Scheduled Commercial Banks. An overview of financial inclusion efforts in India brings to light the challenges faced by small banks prior to 2015. Political interference and high NPA’s were found to be key factors contributing to the same. The model of SFB has been profitable for Sampath SFB and a few others. An analysis of data points to a growing portfolio though skewed towards semi-urban spaces with large ticket size of retail loans. Though priority sector lending may not be the best measure of financial inclusion, SFB’s are faring well in that regard. Marred by challenges of a unique nature, In a competitive environment of credit offerings, SFBs Banks are yet to achieve differentiation and a business model that will address issues including vision drift and over indebtedness.