Norms on small banks fail to impress micro lenders

Tuesday, July 22, 2014

The Reserve Bank of India’s (RBI) draft guidelines for licensing of small banks has failed to impress microfinance companies. While the central bank said it will permit micro-lenders to convert themselves into small banks, many of them are unwilling because of stiff net worth requirements and restrictions imposed on area of operations.

“An existing non-banking finance company/microfinance institution/local area bank, if it meets the conditions under these guidelines, could apply to convert itself into a small bank, after complying with all legal and approval requirements from various authorities. In such a case, the entity shall have a minimum net worth of Rs 100 crore,” RBI said in its draft norms for licensing of small banks released on Thursday. The banking regulator added that it will give preference to micro-lenders, non-banking finance companies and professionals from banking sector to set up these niche banks.

Industry players and analysts, however, believe that it will be difficult for most microfinance companies in Andhra Pradesh to meet the net worth criteria. “While the guidelines are progressive and consistent with the financial inclusion agenda, it is almost impossible for most microfinance companies to meet the norms and convert themselves into small banks. Following the crisis in the sector, barring a few, all microfinance institutions in Andhra Pradesh now have negative net worth,” Kishore Kumar Puli, promoter and chief executive officer of Trident Microfin, told Business Standard.

Source: Business Standard (link opens in a new window)

Base of the Pyramid, financial inclusion, microfinance