New Delhi, Jan 24 (KNN) As two Small Finance Banks commence operations from January 23, experts say the basic objective of creating small finance banks appears to be to legalise the operations of the micro finance institutions (MFI).

Two Small Finance Banks - Utkarsh Small Finance Bank Limited and Suryoday Small Finance Bank Limited – have commenced its operations from January 23, 2017.

The Reserve Bank has issued a licence to the bank under Section 22 (1) of the Banking Regulation Act, 1949 to carry on the business of small finance bank in India.

Talking to KNN, Debashis Bandhopadhyay, MSME Policy Expert, said, “The basic objective of creating small finance banks appears to be to legalise the operations of the micro finance institutions (MFI), most of which were functioning in a grey area, as they  do not conform  to the licensing requirements of non- banking financial corporations (NBFC)s.”

He said this is evident from the provisions of the Licensing Guidelines which allow ‘grandfathering’ of borrowings where existing NBFCs/MFIs set up a small finance bank (SFB) and transfer its business to the SFB as well.

“While formalising of the MFIs will be an welcome step to bring clarity and transparency in their operations, particularly in lending rates, due caution also need to be taken by RBI in regular audit of these banks lest they become another model of Ponzi scheme,” Bandhopadhyay added.

It may be recalled that the Committee on Financial Sector Reforms (Chairman: Dr. Raghuram G. Rajan), 2009 had examined the relevance of small banks in the Indian context. The Committee had opined that there was sufficient change in the environment to warrant experimentation with licensing of small banks.

It recommended allowing more entry to private well-governed deposit-taking small finance banks (SFBs) offsetting their higher risk from being geographically focussed by requiring higher capital, a strict prohibition on related party transactions, and lower allowable concentration norms. (KNN Bureau)