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Small Finance Banks – Is there an Opportunity for MFIs/NBFCs?

First in the series of publications on Small Finance Banks, this note explores the possibilities for MFIs and NBFCs as intending to graduate to SFBs.

First in the series of publications on Small Finance Banks, the IFN titled “Small Finance Banks – Is there an Opportunity for MFIs/NBFCs” explores the possibilities for MFIs and NBFCs as intending to graduate to SFBs. The note identifies two cardinal target segments: (a) low income households and (b) micro and small enterprises, especially in under and unserved regions in India. The low income segments not only have a demand for low-cost financial services but also present a profitable business proposition for financial institutions. The note deliberates on the possibilities and opportunities that Small Finance Banks offer to NBFCs to transform. The note also reflects on the benefits in transformation as SFBs, such as option for product diversification, leveraging low cost structures, brand differentiation, possibility to alter capital structuring, and ability to counter political risk faced by NBFC in the local microfinance sector. SFBs can ensure sustainability through low cost structures in comparison with banks. The transformation also poses greater operational ease for the existing set-up of MFIs/NBFCs as they get to work without constraining factors set for NBFC-MFIs by the regulator. Additionally, it also presents opportunity for greater acceptance in the formal banking sector as SFBs can be a part of the payment and settlement system as a direct member or a sub-member of a sponsor bank.

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Written by

jayan-nair

Anup Singh

Associate Director