Exactly about a decade ago, around the same time, the Reserve Bank of India paved way for ten non-banks to convert into banks, or small finance banks (SFBs) to be specific. Among the ten, three aspire to become universal banks, namely, AU, Ujjivan and Jana SFBs. Another payments bank, Fino, wants to become an SFB.
These applications for getting promoted to the next category is pending for the regulator’s sign off. In a way to fuel hopes, the RBI has set up a five-member Standing External Advisory Committee to evaluate banking applications.
There is merit to these banks wanting to get to the next level; they have demonstrated their ability to grow, sustain it, diversify the book and handle roadblocks in the form of asset quality pressures along the way, exception being Fino because it does not have direct access to credit market. More importantly, they have cross the minimum five-year gestation period required to make an application for an upgrade and on the face of the requirements need for the upgrade, they seem to tick the boxes.
Caution needed
But, this may not be good enough just yet.
For one, the current wave of asset quality issues in the retail segment may not have caught the sector by surprise, but the magnitude and persistence of the pain quarter after quarter for almost a year now is unexpected. Presently, there aren’t telling signs to say that the asset quality issues have abated or whether banks have fully absorbed the extent of pain, including its recognition, and what could be the extent of impact on financials in this cycle. Without certainty on these aspects, it might be jumping the gun to take an optimistic call on even the five years look ahead business models of these applicants.
Furthermore, they have just scratched the surface on the diversification front. Delinquencies of the newly built are either not fully reflective of realities or is higher than the industry average (such as AU’s digital lending book). It would be prudent to assess how the new book pans out over a three-year average rather than taking a call on the asset quality at an aggregate level. In short, it might be prudent to assess a matured ‘newly built’ book rather than judge it at infancy.
Has the current model succeeded?
The objective of handing out SFB licenses to MFI and AU (the only non-MFI non-bank) was to see if a viable model could be built around micro loans. Contrary to this expectation, there is a lot of commentary around why differentiated banking licenses (namely SFB and payments banks) are failed experiments. As much as this aspect can be debated and the argument is not necessarily valid, an upgrade to universal bank from SFB or to SFB from payments bank should not be just a way out to create a more sustainable franchise.
If a bank licensed to operate under a certain model has not shown success in that category, it should not be allowed a right of way in another category.
In short, bank licenses are coveted and it should remain so.
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