Given that SFBs were set up nearly a decade ago, is there a need for the regulatory framework to evolve further?

Fundamentally, an SFB is already meeting almost all the financial needs of its chosen customer segment. From a business perspective, there are very few operational constraints.

When the SFB guidelines were issued in November 2014, certain limits were prescribed. For instance, at least 50 per cent of the loan book must consist of loans of up to ₹25 lakh. One would expect those thresholds to be revised over time to reflect inflation and the growth of the economy.

That said, most SFBs are still comfortably meeting all the prudential norms. Even if the RBI were to revise the thresholds, it would simply be a natural progression rather than a fundamental change in the business model.

We can offer home loans, vehicle loans, business loans, and accept deposits just like any universal bank. The regulatory framework is broadly similar.

Our priority sector lending (PSL) requirement is higher but, in practice, most SFBs already have 60-70 per cent of their loan book under PSL. So, that isn’t a constraint for growth. There is very little that prevents an SFB from serving its target customers effectively.

What is the biggest difference between an SFB and a universal bank?

The biggest difference is the nomenclature. When customers hear “small finance bank”, they often ask whether we can finance larger loans, whether their deposits are as safe as they are with other banks, or whether we are a full-fledged commercial bank.

Over the years, each SFB has built a strong regional brand. For example, ESAF SFB is well known in Kerala, Equitas SFB and AU SFB have a strong presence in Tamil Nadu, and in the North and West, respectively.

Today, customers increasingly recognise these brands independent of the “small finance bank” label. However, the nomenclature still creates a perception challenge and often requires us to offer slightly higher deposit rates compared with larger universal banks. That, in my view, is one of the key motivations for seeking a universal banking licence.

If all SFBs were to transition into universal banks, how different would their balance sheet look?

In most cases it wouldn’t look very different. The business model, customer segments and portfolio composition would remain largely unchanged. The only difference would be in scale.

Several SFBs today are already larger than some existing universal banks.

Should all SFBs transition into a universal bank?

I don’t think so. There is a perception that becoming a universal bank is the natural graduation path. I’m not convinced that’s true. It’s similar to cricket. Not every great player wants to become the captain. Many exceptional players are perfectly happy focusing on their own game. Likewise, an SFB can continue to be a successful and profitable institution without necessarily becoming a universal bank.

So, the pressure is more over perception than business necessity?

That’s right. If you look at successful NBFCs (non-banking financial companies) such as Bajaj Finance, Cholamandalam or Sundaram Finance, they are not clamouring for banking licence. They have built outstanding businesses within the NBFC framework. Their cost of funds is competitive, their operating structures are efficient, and they continue to grow successfully.

Similarly, if regulatory differences do not create a disadvantage, there is no compelling business reason for every SFB to become a universal bank.

If some of the remaining regulatory differences — such as the “small finance bank” nomenclature and restrictions on co-lending — are addressed, there is no reason why SFBs cannot continue to thrive as standalone institutions.

Does India need more SFBs?

India needs a healthy layer of well-governed, mid-sized banks. We shouldn’t think only in terms of consolidation into a handful of very large institutions. A vibrant banking system also requires banks that are growing from ₹1,000 crore to ₹15,000 crore and eventually much larger. Because SFBs start from a relatively small base, they can often grow much faster. Personally, I believe India could comfortably support another 10 well-run small finance banks.

What are the learnings from a decade of SFB operations?

One of the biggest strengths of our sector is that we have already experienced multiple economic cycles in a relatively short period. Many of us have gone through the transition from NBFC into bank, navigated the Covid-19 pandemic and, more recently, dealt with the challenges in the microfinance sector.

Successfully managing these cycles has strengthened the fundamentals of the sector. We have demonstrated resilience, maintained depositor confidence and shown that the business model can withstand periods of stress.

Are you seeing a strong interest from new players in setting up SFBs?

At the moment, not really. For the SFB model to attract new entrants, it has to consistently demonstrate attractive returns, sustainable profitability and a clear competitive advantage over other financial structures.

At present, investors tend to favour either NBFCs or large universal banks. Small finance banks often find themselves somewhere in between.

So improving the positioning of the SFB model is important?

Rather than focusing only on the transition to universal banking, we should strengthen the standalone SFB model. Our priority is to build an excellent banking model that serves customers on both sides of the balance sheet.

How would you do that?

During the first decade of the SFB journey, the liability and asset franchises evolved somewhat independently. Deposits largely came from one customer segment, while loans were extended to another. There has been limited overlap.

The next phase is about deepening those relationships so that the same customer both saves and borrows with us. That creates a much stronger and sustainable banking franchise.

What are your growth aspirations for the next 3-4 years?

Today, we are a bank with a balance sheet of ₹19,884 crore (as at March-end 2026). Our ambition is to become a ₹50,000-crore institution while meaningfully serving around one crore customers. Our aspiration is to serve around 2 per cent of Indian households meaningfully over the next three years. Rather than focusing purely on the balance sheet, our primary metric is meaningful customer reach.

If we can achieve that objective while maintaining a disciplined growth of 25-35 per cent annually, the balance sheet will naturally follow. Sustainable growth is more important than pursuing size for its own sake.

Equally important is building strong market positions in our chosen geographies. Rather than trying to be everything to everyone, we’d like to become a meaningful banking franchise in the markets where we operate. I would rather build a “super SFB” that creates real impact than simply become another universal bank.

You mentioned “meaningfully serving” customers. What does that mean in practice?

Today, we have around 40 lakh customer relationships, but meaningful engagement is lower. For us, meaningful inclusion entails much more than extending a microfinance loan.

Ideally, the customer should have an active savings account, gradually build deposits through regular savings, borrow responsibly as their financial needs evolve and increasingly use digital banking rather than depending on physical collections. When a customer progresses from basic microfinance to becoming a full-fledged banking customer, that is true financial inclusion.

Does that mean your goal is eventually to reduce dependence on microfinance?

Absolutely. In fact, we often say we will truly succeed when customers tell us they no longer need microfinance loans. That doesn’t mean they stop being customers. Rather, they graduate to other financial products — savings, deposits, home improvement loans, vehicle finance or business loans.

As an institution, we must be willing to cannibalise our own products when customers outgrow them. That’s the essence of financial inclusion.