SFBs ready with systems to make the transition, say CEOs at BS BFSI Summit

SFBs have a talent pool of senior managers with over 20 years of experience, ensuring robust succession planning for a professionally managed bank.

Small finance banks (SFBs) in India have put in place systems to become universal banks but they are not in a hurry to do so because they are building scale and capacities for long-term growth, according to their chief executive officers (CEOs).

 

The systems include core banking, an information-technology backbone, and governance.

 

While the Reserve Bank of India (RBI) had set out in 2019 the transition path for SFBs to convert into universal banks, it issued the granular details this year.

 

The heads of SFBs said the gain from turning into universal banks would be reduction in the cost of funds. At present, they pay 25-50 basis points higher than universal banks on deposits. Second, the capital adequacy ratio would come down from the present 15 per cent to 11.5 per cent. Third, priority-sector lending obligations will decline from 75 per cent to 40 per cent, and, finally, it will improve customer satisfaction and the morale of employees.

 

 

Participating in a panel discussion on “Small Finance Banks – Can they go big?” K Paul Thomas, managing director (MD) and chief executive, ESAF SFB, said: “We can do everything. We got the authorised dealer licence last year.”

 

“The main thing is that the word ‘small finance’ will go away from conversion and SFBs will be treated equally with universal banks. So one major thing is that the public perception will be changed,” Thomas added.

 

Seconding Thomas’s view, Govind Singh, MD and CEO, Utkarsh SFB, said: “If you look from the balance sheet size, we may be looking at numbers only, but if you look at the number of clients, the number of employees, and the network of branches, many SFBs may be bigger than many universal banks.”

 

“If we can get ‘small’ removed from the name, either through regulation or by becoming a universal bank, it will help us. But otherwise, we are big in terms of impact, footprint, and network, and we can do things universal banks can’t do,” he added.

 

Dwelling on the positives of becoming SFBs, Ajay Kanwal, MD and CEO, Jana SFB, said “big” did not just mean size. Many SFBs are bigger than a lot of universal banks in terms of size and branch network, he said.

 

“SFBs have created that model. Look at our digital backbone, the processes, and the profitable model despite priority-sector lending. So you look at capital adequacy, you look at return on assets, return on equity, etc. The second is modernity and the third is creating a commercially viable profitable model.”

 

Kanwal, however, sounded a note of caution: “We are growing pretty fast. And as you know, growing too fast may have its own risks. So we rather go at a measured pace.”

 

R Baskar Babu, MD and CEO, Suryoday SFB, said: “We have not been discriminated against. The regulations are the same as they are for universal banks.”

 

“Currently we all comply. So from the preparedness point of view, it is just the cost of changing signages and branding. Other than that I think most of us are on the same platform as far as universal banks are concerned. So I don’t think there is any big cost involved,” Babu added.

 

Referring to the timeline for becoming universal banks, Babu said: “I am clear that I will not even give it a shot for the next three years.”

 

Thomas of ESAF SFB said his bank was not in a hurry to become a universal bank. “We are a more impact-focused institution. We started as a non-government organisation. We wanted to make an impact in communities. So I am able to make an impact in society as a small finance bank.”

 

“Utkarsh is gearing up for this transition and we are not in a hurry. In fact, for us the bigger work right now is the reverse merger of our holding company. The process is on and normally takes around a year. Once the reverse merger process is over, we will look at the next step of becoming a universal bank,” said Singh of Utkarsh.

 

Kanwal of Jana SFB said: “I have one criterion to meet, which is that the SFB should have less than 1 per cent net non-performing asset (NPAs) for two years. I met that last year and I am trying my best to meet it this year. If I am able to meet it, I will put up my proposal to the regulator next year.”

 

The CEOs said their governance and management practices were on a par with those followed by the universal banks. They had a talent pool of senior managers with over 20 years’ experience, which would help in addressing the issue of succession planning to run a bank on professional lines. 

Catch all special coverage of the Business Standard BFSI Summit 2024 here: BS BFSI Summit 2024