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Dumka in Jharkhand writes an inspiring story for the world. The women of this tribal village have been making bamboo and water hyacinth handicrafts for ages. The task requires special skills, but used to collect them just enough to make ends meet. This is now the story. Their lives were transformed when ESAF Small Finance Bank approached them and offered them loans to grow their business. Today, among others, they sell to the Swedish furniture retailer Ikea, which markets their products worldwide. Women, who used to earn around ₹50 per day, now earn ₹8,000 per month. “Small loans can transform communities. We believe that job creation is a means of economic empowerment. For example, we trained tribal women in Kerala and gave them small loans to start micro-enterprises. One of our group entities, CEDAR Retail, has built a complete supply chain for this,” says K. Paul Thomas, MD and CEO of ESAF Small Finance Bank.

Financial inclusion, after all, is not just about opening bank accounts and bank branches in remote areas. It’s also about creating an ecosystem for job creation so that people can start making money and focus on saving and investing. Small financial banks (SFBs), launched half a decade ago, are driving this change in the most remote corners of the country.

The business case

According to CRISIL Research, rural areas account for about half of India’s gross domestic product, but only 9% of bank credit and 11% of deposits. The numbers were much lower in 2014. The divide between urban and rural India prompted the Reserve Bank of India (RBI) under Raghuram Rajan to issue guidelines for licensing SFBs.

RBI initially issued 10 SFB licenses to most microfinance institutions, local banks and non-bank financial companies (NBFCs). The first two, Capital Small Finance Bank and Equitas Small Finance Bank, started operations in 2016, followed by seven in 2017 and another in 2018. Shivalik Small Finance Bank was the first cooperative bank to obtain the SFB license. It started operations in January 2021. RBI has also granted Centrum Financial Services approval in principle for the establishment of a small corporate bank after taking over Punjab & Maharashtra Co-Operative Bank Ltd. A banking license reduces the cost of funds by allowing SFBs to raise deposits. According to a report by ICICI Securities, the cost of funds for SFBs is 100 basis points lower than most NBFCs. Their additional credit share was 8% as in September 2021, the report said.

However, SFBs must meet strict conditions. They must lend at least 75% of the funds to the priority sector; for regular commercial banks, the number is 40%. And at least 50% of the loan portfolio should have loans of up to ₹25 lakh. “The fact that all banks meet these requirements shows that we are reaching segments where financial inclusion is needed,” said Murali Vaidyanathan, senior president and country head at Equitas Small Finance Bank.

SFBs have become pioneers in taking out small loans to the self-employed who do not have enough credit history to assess their creditworthiness. They reported a 42% CAGR of loans from FY2018 to the end of September 2020, compared to 13% for private banks and 2% for public sector banks. Their overall share of the credit market was 1% in September 2021. “The latest data shows that the unique borrower base of MFIs was six crore in March 2021. high (already in 3rd or 4th loan cycle) up to ₹1 lakh, the immediate addressable market for SFBs is equivalent to ₹2.75 crore lakh or 2.5 times their current assets,” an ICICI report states. Securities.

Post-crisis opportunity

SFBs have faced several challenges in realizing their potential. They had barely recovered from demonetization when the first Covid-19 lockdown hit businesses and collections. SFBs faced a severe deterioration in asset quality in fiscal 2021.

The situation is improving now. NPAs are falling and credit growth is impressive. “With the economic recovery, we are seeing good growth in SFBs, especially listed ones. Their credit growth is much better than the rest of the public/private banking system. Asset quality deteriorated after Covid-19, but is improving,” says Ajit Kabi, equity research analyst (institutional, banking and NBFC) at LKP Securities.

AU Small Finance Bank has maintained a collection efficiency of 100%. It reduced its QoQ GNPA ratio from 3.2% to 2.6% in the December quarter. “Covid-19 helped us in the sense that it tested our credit model. We increased our communication with customers to build trust. Borrowers started repaying just as businesses were picking up,” says Uttam Tibrewal , Executive Director, AU Small Finance Bank.

Some SFBs had to be flexible and manual borrowers. Ujjivan SFB restructured loans, where necessary, to support customers. “We have deployed analytics tools to increase the efficiency of collection efforts,” says Ittira Davis, CEO and CEO. ARPN ratio decreased from 11.8% in Q2 FY2022 to 9.8% in Q3 FY2022. ARPN almost halved from 3.3% in Q2 FY2022. fiscal 2022 to 1.7% in Q3 fiscal 2022.

“We started reaching smaller places through micro ATMs so people don’t have to travel,” says Vaidyanathan of Equitas. “We have also ensured the stability of our savings rates. We offered the best rates during Covid-19 when other banks were cutting rates,” he says.

Go digital

Covid-19 was a challenge, but it also accelerated digitization. While smaller SFBs have yet to catch up, Equitas, AU and Ujjivan are taking a number of digital initiatives. AU Small Finance Bank launched a super app, AU 0101, which saw 39% QoQ growth in sign-ups in the December 2021 quarter; 20% of those who registered were not AU clients. Recent video banking services have improved customer reach and engagement. The credit card base has reached one lakh. In total, more than 50,000 credit cards were issued during the December quarter, 53% of which were for new users. AU is also the first bank to launch the QR soundbox which helps merchants hear notifications about new payments.

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