SFBs with Larger Balance Sheets Outperform Universal Banks: Panel

According to a panel discussion at the Business Standard BFSI Insight Summit 2023, small finance banks (SFBs) with larger balance sheets are outperforming universal banks. While the Reserve Bank of India allows SFBs to apply for universal bank licenses after five years of operation, none of these lenders have done so yet. Participants at the panel highlighted the need for SFBs to develop diverse product lines before applying for this license and emphasized the importance of maintaining their focused area even after becoming universal banks. The discussion titled ‘Can SFBs become universal banks’ included industry leaders such as Sanjay Agarwal, managing director and CEO of AU SFB, Ittira Davis, MD and CEO of Ujjivan SFB, Ajay Kanwal, MD and CEO of Jana SFB, and Inderjit Camotra, MD and CEO of Unity SFB.

Panel Discussion at the Business Standard BFSI Insight Summit 2023

The Business Standard BFSI Insight Summit 2023 featured a panel discussion on the topic of whether small finance banks (SFBs) can become universal banks. The participants in the panel included industry experts and CEOs of prominent SFBs, including Sanjay Agarwal of AU SFB, Ittira Davis of Ujjivan SFB, Ajay Kanwal of Jana SFB, and Inderjit Camotra of Unity SFB. The discussion aimed to explore the eligibility of SFBs for universal bank licenses, the benefits of diverse product lines for SFBs, and the implications of larger balance sheets for these banks compared to universal banks.

Importance of Diverse Product Lines for SFBs

The panelists highlighted the significance of having diverse product lines for SFBs before they can apply for a universal bank license. Expanding the product portfolio allows these banks to increase their revenue streams, mitigate business risks, and enhance customer experience. By offering a wider range of financial products and services, SFBs can attract a broader customer base and generate more income. Additionally, having a diverse product portfolio helps these banks diversify their risk by not relying on a single product or service for their revenue.

Importance of Focused Area for SFBs

While the need for diverse product lines is important, the panelists also emphasized that SFBs should not lose sight of their focused area. In particular, SFBs specialize in financial inclusion and strive to serve the underbanked and underserved population. By focusing on this niche market, SFBs can deepen their customer relationships, build brand reputation, and establish themselves as leaders in financial inclusion. It is crucial for SFBs to maintain their commitment to their core mission even as they expand their product offerings.

SFBs’ Eligibility for Universal Bank License

The Reserve Bank of India (RBI) allows SFBs to apply for universal bank licenses after five years of operation. The panelists discussed the eligibility criteria set by the RBI, which includes meeting regulatory requirements, demonstrating financial stability, and maintaining capital adequacy. SFBs that have successfully met these criteria can be considered for a universal bank license. However, the panelists noted that despite being eligible, none of the SFBs have applied for this license yet.

Reasons for SFBs Not Applying for Universal Bank License

The panelists discussed several reasons why SFBs have not applied for a universal bank license. Firstly, many of these banks prioritize product line expansion and focus on business growth. They believe that by strengthening their existing operations and expanding their product offerings, they can better serve their target market. Additionally, navigating the regulatory environment associated with universal banking is seen as a challenge. SFBs have built their competitive advantage based on their specialization in financial inclusion, and they may hesitate to dilute their focus by becoming universal banks.

Benefits of Larger Balance Sheets for SFBs

One of the key findings discussed during the panel was that the balance sheets of SFBs are larger than those of universal banks. This has several benefits for SFBs. Firstly, it increases their lending capacity, allowing them to cater to a larger number of customers and offer higher loan amounts. Secondly, it improves their liquidity position, enabling them to meet the financing needs of their customers more effectively. Thirdly, it enhances risk management capabilities by providing SFBs with the resources to absorb potential losses.

Comparison of Balance Sheets of SFBs and Universal Banks

The panelists compared the size and composition of balance sheets of SFBs and universal banks. They highlighted the differences in the asset and liability mix between the two types of banks. SFBs tend to have a higher proportion of loans and advances, given their focus on lending activities. Universal banks, on the other hand, have a more diverse mix of assets, which may include investments in securities and non-lending activities such as wealth management and investment banking. These differences in balance sheet composition have implications for the financial performance and risk profiles of SFBs and universal banks.

Outperformance of SFBs with Larger Balance Sheets

The discussion also highlighted that SFBs with larger balance sheets tend to outperform their peers. The increased lending capacity and enhanced risk management capabilities provided by larger balance sheets contribute to the superior performance of these banks. By having larger balance sheets, SFBs can leverage their resources to support business expansion, attract more customers, and generate higher revenues. This further emphasizes the benefits of having diverse product lines and larger balance sheets for SFBs.

Implications for the Banking Sector

The panelists discussed the implications of the findings for the banking sector as a whole. They emphasized the importance of a diverse banking landscape, where SFBs play a crucial role in serving the underbanked and underserved population. The entry of SFBs has the potential to disrupt the traditional universal banking model and create opportunities for innovative and customer-centric banking solutions. The panelists also shed light on the regulatory considerations associated with the transformation of SFBs into universal banks. The RBI will play a crucial role in ensuring a smooth transition and maintaining stability in the banking sector. Overall, the future outlook for SFBs remains promising, given their unique positioning and potential for growth in the Indian banking sector.

In conclusion, the panel discussion at the Business Standard BFSI Insight Summit 2023 provided valuable insights into the eligibility of SFBs for universal bank licenses, the importance of diverse product lines and focused areas for SFBs, the benefits of larger balance sheets, and the implications for the banking sector. The findings highlight the potential of SFBs to make a significant impact in the Indian banking industry, catering to the needs of the underbanked and underserved population while offering innovative and customer-centric financial solutions.