How do you see the trend of SFBs wanting to transition to universal banks?

So, today, from a regulatory point of view, there are no constraints in terms of the deposits SFBs can mobilise, or getting an authorised dealer (AD-Category I) licence to undertake foreign exchange transactions. There are very few areas of exclusion for SFBs — currently, we cannot buy portfolios; we cannot do co-lending (which, I hope, the RBI will allow).

By and large, the overall signalling is that we will have the same opportunities as a large bank, except for the priority sector lending (PSL) norm (for a universal bank, the target is 40 per cent; and for SFBs, it is 60 per cent). This norm is not a constraint for many of us.

We are excluded from government business and taking deposits from government ministries, departments or their undertakings, because we are not included in their list of recognised banks for doing business.

Since the regulatory treatment and supervision of SFBs is as stringent as it is for universal banks, that will probably encourage many of us to grow as large SFBs — large small banks.

One of the struggles we have is in explaining to customers what a small finance does. This is translating into expensive deposits. So, if we’re known by a ‘regular bank’ nomenclature, doing a lot of financial inclusion, probably we’ll be able to get deposits at a lower rate than even universal banks.

Some of the SFBs rightly believe that as a universal bank, cost of deposits will reduce by 50 basis points or 70 basis points. As most of us want to go into secure lending, we need to have better (lower) cost of funds... customers should have full clarity that we are a (regular) bank.

For many depositors, SFBs are not the primary bank. What efforts are you making to change this?

We should do something at the industry level. For many customers who are highly banked, even if they maintain a good second account with us, it’s good enough. But what is it that we are bringing to the table beyond what their main account with a good public sector or private sector bank is already offering? There has to be a value-add from us.

So, some of us have started a secured credit card (against fixed deposit), which has various uses like, say, UPI. You don’t want your statement to be cluttered with small transactions... So, a substitute would be in terms of a secured credit card... It will also be useful for our inclusive finance customers. They will start getting used to revolving credit.

But for all this, financial literacy is extremely important. Otherwise, mis-selling can happen. So, new product introduction has to be followed by a financial literacy campaign. And, sometimes, it is much better for financial literacy to happen at the industry level, rather than company level. We need to take a leaf out of the successful ‘Mutual Fund Sahi Hain’ campaign. So, everybody in the industry gets benefited.

At the industry level, if we create awareness about what SFBs do as a whole and how impactful they are, then the entire sector will get benefited. SFBs are banks with a purpose and impact. And that has to be magnified.

Otherwise, technically, SFBs get confused with ‘small’. Small gets equated to ‘risky’. Which is probably why, at some point, the regulator may revisit the ‘small finance’ nomenclature for SFBs and say they are a bank.

Every NBFC (non-banking financial company) is known as just that. You don’t classify Cholamandalam as a Tier one or large NBFC, or some other entity as a small NBFC.

It is an NBFC and, within that, there are various categories in terms of regulation and so on. For us, small finance banks, the regulations or the framework is the same as for a universal bank. Given all this... a simple nomenclature change to ‘bank’ itself will benefit us.

How do you plan to overcome the constraints in doing business due to the ‘small finance’ nomenclature?

SFBs put together cater to approximately 8 per cent of customer households in the country. But our market share is only 1.5 per cent, either in terms of loans or in terms of assets of the banking sector.

Similarly, if we look at employee strength, SFBs account for 7.5-8 per cent of the total employees in the banking sector. So, we are catering to a large customer base through a larger workforce (feet on street). Combined together, the impact is much higher.

Customer service experience at SFBs is far, far superior, in my view. That is why many of them say service levels are excellent across SFBs.

I think, it is time to reach the last mile, the customers, the public at large with a campaign that says, ‘here is a differentiated set of banks with a purpose, with an impact...’ that can really go a long way.

Do we need more SFBs?

We have been getting good regulatory support. We’re all eight to nine years old now. And hopefully, we have lived up to the expectations of the government and the regulator. We have managed to grow, managed to create an impact. I think, this is the first phase of SFBs. The country requires more well-governed banks.

To have very large domestic banks, you need a middle way — perhaps having many good, well-governed SFBs. As the RBI Governor (Sanjay Malhotra) mentioned last month, we (SFBs) are like students in a nursery, who will graduate, and then become postgraduates. And then, probably, there will be an ecosystem comprising many banks.

And at some point, some consolidation may happen, which means suddenly we will see large banks born out of many, many small banks.

How helpful will the relaxation in PSL norms be?

Well, the immediate benefit is nothing substantial, but where it will certainly help is in kind of aligning us closer to the universal banking platform.

And certainly, the reduction in the PSL target (to 60 per cent from 75 per cent) helps in diversifying assets, to do things which will give us far more stability and probably higher profitability for a period of time. As to whether this will have an immediate impact this year, that may not be.

But this is a good signal from the regulator, asking us to really build a robust model. They have been very supportive in terms of having a glide path.