Paper
Small Finance Banks: Is There an Opportunity for MFIs/NBFCs
Discussing the benefits of obtaining a Small Finance Bank License for MFIs and NBFCs
2 pages
This focus note explores the opportunities that MFIs and non-banking financial companies (NBFCs) can capture by graduating to small finance banks (SFBs). The concept of SFBs was introduced in India in November 2014 as a new banking entity to cater to the needs of two target segments: low-income households and micro and small enterprises. The note examines the possibilities that SFBs offer to NBFCs to transform into banks, and also reflects on the benefits of this transformation. It suggests that SFBs can ensure sustainability through low-cost structures and enjoy greater operational ease as they can function without the regulatory constraints that are faced by NBFC-MFIs. Other key benefits highlighted in the paper include:
- Transformation will allow for diversification of the range of products to create a holistic product suite;
- SFB licenses will allow MFIs to create differentiated brands and leverage these to create long-term client relationships;
- In the long-run and with customer-centric offerings, it will be possible for SFBs to mobilize savings at costs lower than debt;
- Transformation into SFBs will reduce the possibility of political interference;
- SFBs will be able to strengthen their business case by creating a judicious mix of high and low value customers.
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