The Reserve Bank of India’s Deputy Governor Swaminathan J spoke on the significance of the role SFBs play in India’s financial ecosystem, stating, “The goal for Small Finance Banks is far from ‘small.’ They must extend financial services to the underserved, promote entrepreneurship, and drive inclusive growth – all of which are critical for India’s journey towards becoming a high-income economy.”
He further urged SFBs to move beyond compliance and focus on evaluating the true impact of their financial outreach.
“Small Finance Banks must not limit themselves to just meeting regulatory requirements. It’s crucial that they assess the actual outcomes of their efforts, particularly in terms of how they benefit underserved communities,” he added.
Swaminathan also encouraged SFBs to actively participate in government-sponsored schemes to widen access to affordable credit for vulnerable sections of society.
Recommendations for SFBs
Sustainability of Business Models: Swaminathan called on Boards to evaluate the long-term sustainability of their growth strategies, cautioning against over-reliance on high-cost deposits. “Boards should review both the liability and asset sides of the balance sheet, ensuring there is no undue dependence on high-cost term deposits or bulk deposits from a few institutions,” he noted.
Credit Risk and Underwriting: He expressed concerns about the expansion into unsecured retail lending without proper risk assessment. “While many banks have expanded into unsecured retail lending, the correlation risk during economic downturns becomes more pronounced,” Swaminathan warned. “Rigorous underwriting processes are essential, and they must go beyond automated systems to assess factors like income stability and credit history.”
Swaminathan also urged banks to avoid coercive recovery practices, saying, “Coercive recovery methods harm the bank’s reputation and invite regulatory repercussions. Instead, banks should adopt collection strategies that emphasize communication and collaboration with borrowers, adhering strictly to fair practices.”
Cyber-Security and IT Resilience: Addressing the growing cyber-security risks, Swaminathan said, “SFBs have embraced technology, but with their expanding digital footprint comes significant risks from cyber threats, frauds, and data breaches. Banks must stay ahead of these threats by adopting robust cyber-security protocols, comprehensive data protection measures, and effective business continuity plans.”
Operational Risk and Attrition: Swaminathan warned that rapid growth often leads to overlooked operational risks, such as inadequate KYC checks and untested technology deployments. “Growth must not come at the cost of neglecting essential risk management practices. Proper controls must be in place to mitigate operational risks,” he stressed.
He also highlighted the high attrition rates in SFBs as a significant operational risk. “With an attrition rate of nearly 40% in frontline staff, the sector faces a serious challenge. High turnover disrupts service delivery and increases costs. Boards need to focus on employee retention and succession planning to mitigate these risks,” he said.
