Four years after the RBI allowed differentiated banks alongside full scale commercial banks, the banking regulator has indicated granting more licences in the Small Finance Bank category throughout the year. The RBI's optimism comes from the fact that these micro-finance institutions turned banks have achieved priority sector targets and hence helped in achieving financial inclusion. However, it would be too early to open the gates for all. The RBI should be cautious as initial success of the existing close to a dozen banks came from their erstwhile micro-finance business.
These banks are yet to see an economic cycle of boom and bust to show their strong foundation. In fact, there are many challenges that await them as they have to enter the IPO market as agreed in the guidelines. The big challenge still is to scale up lending, tap low-cost deposits and maintain better asset quality. If one studies the experience of the new generation private banks that got licences post the 90s, many folded up, and others were merged or acquired. Experts suggest that the RBI should experiment more by giving licences to categories other than MFI before allowing more of the same.
