Role of Small Finance Banks in the Inclusive Growth of our Economy

It is estimated that globally over 2.5 billion people are excluded from access to financial services of which one third is in India. Though the reach and scope of banking have thus increased, the huge demand for financial services remains insatiate. It is a matter of concern that even with 150 domestic commercial banks comprising 19 Public Sector Banks, 20 Private Sector Banks, 44 Foreign Banks, 4 Local Area Banks, 56 Regional Rural Banks and over 2,700 Co-operative Banks operating in the country, just about 40 percent of the adults have formal bank accounts1.To widen the scope of the banking sector reforms, the Centre focused on financial inclusion, digital banking, and better risk management. Various initiatives have been taken by the Reserve Bank of India for strengthening financial inclusion. One such initiative is the issue of Differentiated Banking Licenses to financial institutions to convert themselves into either Payment Banks or Small Finance Banks.RBI issued in-principle approval to start 11 Payment Banks and 10 Small Finance Banks. Financial inclusion plays a major role in the inclusive growth of the country. The growth of our economy is dependent on the growth of rural India. The availability of quality financial services in rural areas will enable a large number of rural households to fund the growth of their livelihoods. The present paper focuses on the study of Small Finance Banks and their role in promoting financial inclusion in India.

It is estimated that globally over 2.5 billion people are excluded from access to financial services of which one third is in India. Though the reach and scope of banking has thus increased, the huge demand for financial services remains insatiate. It is a matter of concern that even with 150 domestic commercial banks comprising 19 Public Sector Banks, 20 Private Sector Banks, 44 Foreign Banks, 4 Local Area Banks, 56 Regional Rural Banks and over 2,700 Cooperative Banks operating in the country, just about 40 per cent of the adults have formal bank accounts 1 .
To widen the scope of the banking sector reforms, the Centre focused on financial inclusion, digital banking and better risk management. Various initiatives have been taken by Reserve Bank of India for strengthening the financial inclusion.
One such initiative is the issue of Differentiated Banking Licenses to financial institutions to convert themselves into either Payment Banks or Small Finance Banks. RBI issued in-principle approval to start 11 Payment Banks and 10 Small Finance Banks.
Financial inclusion plays a major role in inclusive growth of the country. The growth of our economy is dependent on the growth of the rural India. The availability of quality financial services in rural areas will enable the large number of rural households to fund the growth of their livelihoods.
The present paper focuses on the study of Small Finance Banks and their role in promoting financial inclusion in India.

Introduction
The origin of the current approach to financial inclusion can be traced to the United Nations initiatives, which broadly described the main goals of inclusive finance as access to a range of financial services including savings, credit, insurance, remittance and other banking/ payment services to all 'bankable' households and enterprises at a reasonable cost.
Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost (The Committee on Financial Inclusion, Chairman: Financial Inclusion refers to universal access to a wide range of financial services at a reasonable cost. These include not only banking products but also other financial services such as insurance and equity products (The Committee on Financial Sector Reforms, Chairman: Efforts for financial inclusion started with the nationalization of 14 commercial banks in July 1969 and 6 commercial banks in 1980. With a view to provide more banking services in rural areas, regional rural banks were established in 1975. To enhance more access to financial services by rural population, post liberalization banking reforms started to take place in April 2010, which includes issue of universal and differentiated banking licenses. To deepen the financial inclusion process and to undertake digital banking, Reserve Bank of India issued differentiated banking licenses (in-principal approval) to: The existing conventional banks, including public and private sector can provide all banking services and products. While differentiated banks like payment banks and small finance banks can provide only select banking services and products. RBI has adopted differentiated banking license policy to promote financial inclusion and to enable quick payment services using new banking technologies.

Rationale of the Study
The efforts of financial inclusion by the Centre and RBI are increasing day by day. The Mr. P. Chidambaram expressed concern about the fact that most of our banks were clones of others rather than having a differentiated identity. Differentiated banking licenses are important as such banks would be innovative in their structure and would lead to better attainment of the financial objectives. The failure of various companies in not getting a banking license from the RBI and being asked to go back to the drawing board and draft a new application for differentiated permits instead of a full license is a clear indication from the RBI of its objective of a greater financial inclusion. According to one of the reports, the differentiated banking activity licenses issued to Regional Rural Banks and Local Area Banks (LABs) could not achieve the objectives for which they were set out which prompted authorities to call for larger size banks to go for rapid financial inclusion in a time bound and phased manner.

Objectives of the study:
 To study the impact of Small Finance Banks on financial inclusion.
 To know the financial performance of select Small Finance Banks.

Methodology:
The present study is based on the secondary data which is collected from Annual Reports, Banks Websites, books, journals and news papers. Simple statistical tools have been used to analyze the collected data.

Limitations:
 The study is limited to only select Small Finance Banks.

Payments Banks
On, August 19, 2015, Reserve Bank of India granted 'in-principle' approval to 11 applicants to start a payments bank. The Committee of the Central Board (CCB) of RBI has selected 11 entities that have the reach and the technological and financial strength to provide service to the customers and promote government's initiative of financial inclusion across the country.
These banks are expected to reach customers mainly through their mobile phones rather than traditional bank branches. Out of these 11 applicants, Tech Mahindra Ltd, Cholamandalam Investment and Finance Co and billionaire Dilip Shanghvi have opted out.

Small Finance Banks
On September 17, 2015 The Reserve Bank of India (RBI) has granted in principle approval to 10 entities to set up small finance banks to provide basic banking services to small farmers and micro industries. The in-principle approval will enable these entities comply with the guidelines on Small Finance Banks and will be valid for 18 months. As per RBI guidelines, the small finance banks can provide basic banking services in order to promote financial inclusion. It will include services like accepting deposits and lending to the unbanked sections such as micro business enterprises, small farmers, micro and small industries and unorganized sector entities.

RBI Guidelines for Small Finance Banks:
 Take small deposits and disburse loans  Distribute mutual funds, insurance products another simple third-party financial products  Lend 75% of their total adjusted net bank credit to priority sector  Maximum loan size would be 10% of capital funds to single borrower, 15% to a group  Minimum 50% of loans should be up to 25 lakhs  Cannot lend to big corporate and groups  Other financial activities of the promoter must not mingle with the bank  It cannot set up subsidiaries to undertake non-banking financial services activities  Cannot be a business correspondent of any bank

Common Features of both Payments Banks and Small Finance Banks
In regard to both Payments Banks and Small banks the draft guidelines have some common features. As per the guidelines, the minimum paid-up capital is Rs.100 crore. Promoters' initial contribution will be at least 40 per cent to be locked in for five years. The banks can be promoted by individuals who have at least 10 years of experience / expertise in financial or banking field or by private sector companies or societies with good track record. The promoters will have to be resident Indians or owned and controlled by resident Indians. They will have to conform to stringent 'fit and proper' criteria.
In case of small banking finance existing MFIs, NBFCs or LABs can opt for conversion, and that of payment banks existing PPIs can opt for conversion.
The capital adequacy framework is same for both type of banks --Minimum Capital Requirement (15 per cent) and Common Equity Tier 1 (6 per cent).

Note: Based on the population size, the location of a bank branch is classified as under
Rural: Population less than 10,000 Semi Urban: Above 10,000 and less than 1lakh Urban: Above 1lakh and less than 10lakh Metropolitan: 10lakh and above   As per the quanta analysis the bank branches have not spread much in rural areas.
 Only 1/3 of branches spread in rural areas.
 The population served per bank is way higher in rural areas compared to urban branches.
 This report represent banks by located based on region in central India has the most number of rural branches and in the north eastern region is very less spread bank branches to rural areas.
 A majority of the banks in rural areas are in the public sector banks.
 North eastern region is the worst in terms of population served

Conclusion
There is enormous unmet potential demand lying in the rural areas and other unbanked centres which needs to be tapped. To tap this unmet demand for financial services, it is felt that it is worth experimenting on new types of institutions for financial inclusion. However, in a country like India where there exists differentiated markets and consumer groups, the concept may have to be contextualized according to the needs of the customers. As regards the health of the differentiated banks, there is a need for creating a balance between long term sustainability and the financial inclusion goals. It is becoming increasingly apparent that addressing financial exclusion will require a holistic approach on the part of the banks in creating awareness about financial products, education, and advice on money management, debt counseling, savings and affordable credit.