The Reserve Bank of India has selected 10 financial institutions to set up separate small banks to lend funds to small businesses and farmers struggling to get financial help. Most of them are microfinance companies that already make small loans. The list included private-equity backed Ujjivan Financial Services Pvt Ltd and Janalakshmi Financial Services Pvt Ltd.
More than 100 million people in the country work at small businesses but only about 4 per cent of small businesses have access to institutional finance. These small banks will help micro-finance firms to increase their loan ticket size although they must make sure that half of their loan book constitutes loans of not more than 2.5 million rupees. Existing non-bank finance companies, local area banks and micro-finance institutions were eligible to apply for the permits and 72 submitted applications. Winners will be able to become fully fledged banks in the future, depending on their performance and if they comply with rules for banks, the RBI has said, although the transition will not be automatic.
Janalakshmi's investors include Morgan Stanley Private Equity Asia and TPG, while Sequoia Capital and the World Bank arm IFC are investors in Ujjivan. Other institutions selected for small bank permits included Au Financiers (India) Ltd, Capital Local Area Bank Ltd and Disha Microfin Pvt Ltd.
