RBI Must Incentivise Setting Up Small Finance Banks, Says C Rangarajan
Former Reserve Bank of India governor C Rangarajan on Monday urged the central bank to incentivise the setting up of more Small Finance Banks across the country. Speaking in Chennai during his address after inaugurating Equitas Small Finance Bank’s Equitas Towers, Rangarajan highlighted the distinct role these niche institutions play in the financial ecosystem.
Rangarajan pointed out that 11 Small Finance Banks are currently operational in India. He noted that while these entities serve targeted segments, virtually all of them share an ambition to grow into full-fledged banking institutions over time.
“I believe SFBs will have a role to play. All SFBs aspire to become universal banks. I am not complaining, but the fact of the matter is that all spinoff SFBs ultimately want to become universal banks. But certainly, I think the RBI must think about how to incentivise the setting up of SFBs,” Rangarajan said.
He further explained that regulatory burdens often discourage new entrants unless special support or motivations exist. “I understand that SFBs have an obligation to fulfil the same set of conditions as universal banks. Therefore, unless some set of people are motivated by other considerations, the initiative for setting up SFBs will not be there. So, I would appeal to the RBI to look at how to incentivise the setting up of SFBs,” he added.
Beyond small finance lenders, the former central bank governor voiced strong reservations regarding the ongoing consolidation among Regional Rural Banks. He warned that shrinking the footprint of these lenders harms their foundational mandate.
“The number of RRBs has come down. To me, this is a step in the wrong direction. It essentially takes away the local and regional character of these banks, and ultimately, they may get merged with universal banks as well,” Rangarajan said.
Rangarajan also touched upon the functioning of Self-Help Groups, observing that their core identity has shifted. While noting that the groups were designed as a model where people unite to produce or manage initiatives, he stated that they have now virtually become mere instruments for fulfilling certain government projects, which he described as counter to the spirit behind their original establishment.
