SMALL FINANCE BANK AND FINANCIAL INCLUSION - A CASE STUDY OF UJJIVAN SMALL FINANCE BANK - a case study of ...
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Studies in Indian Place Names ISSN: 2394-3114
(UGC Care Listed Journal) Vol-40 Issue-13 February 2020
SMALL FINANCE BANK AND FINANCIAL INCLUSION - A
CASE STUDY OF UJJIVAN SMALL FINANCE BANK
R.S.KITTU, Research Scholar,
Department of Commerce,
KLE Society’s S. Nijalingappa College,
Rajajinagar, Bangalore - 560 010, Karnataka
Dr. MAHANANDA B CHITTAWADAGI, Associate Professor,
Department of Commerce,
KLE Society’s S. Nijalingappa College,
Rajajinagar, Bangalore - 560 010,Karnataka
Abstract
The term "financial inclusion" has gained importance since the early 2000s, a result of
identifying financial exclusion and it is a direct correlation to poverty according to the World
Bank.Despite the growth which the banking sector has made especially in the last two decades,
there are concerns that banks have not been able to include vast segments of the population,
especially the disadvantage sections of the society. In the Indian context, the term ‘financial
inclusion’ was used for the first time in April 2005 in the Annual Policy Statement presented
by Y.Venugopal Reddy, the Governor, Reserve Bank of India.Estimate and surveys of different
study reports point out that exclusion levels of people in India is estimated to be around 40%.
Financial access to the lower income strata of the society at an affordable cost is a requirement
for poverty reduction and social cohesion. It is a key step for progress and growth. Under this the
several initiatives have been taken by the Government of India, Reserve Bank of India and
various other agencies to improve the financial inclusion scenario in the country. This paper
discusses the various aspects of financial inclusion and the role of SFB in expanding the access
to finance agenda of the government.
Keywords: Differentiated banking license, financial inclusion, small finance banks, micro
finance, etc.
1. Introduction
Government of India has taken many initiatives. Commercial banks play a vital role in
the economic development of the society by ensuring mobilization of savings and providing
credit to various poverty eradication programmes. Likewise, different institutions such as
Industrial Development Bank of India, Industrial Finance Corporation of India, and Small
Industrial Development Bank of India are functioning to fulfill various financial requirements of
different segments of the country. Also Co-operative Banks, Regional Rural Banks and Local
Area Banks are institutionalized by Reserve Bank of India to focus on financial inclusion
programmes and satisfy the financial needs of small customers in rural and semi-urban areas. All
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(UGC Care Listed Journal) Vol-40 Issue-13 February 2020
these financial institutions have not fully succeeded to cater to the entire society, mainly rural
and semi-urban small customers because of organizational limitations and financial illiteracy.
The concept of Small finance Bank is the new step taken by RBI to bring unbanked and under-
banked community under the territory of banking sector. Hence, RBI issued license to ten
institutions to start SFB in the nation. As Micro Finance Institutions have been practicing among
rural people for long time, they are in a position to understand the credit needs of rural area and
semi-urban under-served population. These small finance banks are new and innovative in the
formal banking sector.In case of small banks, deposits and loans are provided by small banks for
small areas. Farmers, small and medium entrepreneurs and other unorganized sector people are
getting assistance from small finance banks. Chances are rendered for micro finance institutions
and no- banking financial companies to set up small finance banks. License should be granted for
such micro finance institutions and non banking financial companies to start small finance banks
which will serve for a quarter of rural branching and a half of loan facilities to farmers, micro,
small and medium entrepreneurs. License for small finance banks cannot be applicable to co-
operative banks. From the point of view subsidiaries, small finance banks cannot have their
subsidiaries. Investment in government securities is permitted but fixed deposits or loans are not
admitted. Concern of payment bank focuses on the poor people, migrants, and the unorganized.
Payments and remittance to the poor, migrant and the unorganized can also be possible via post.
2. Small finance bank
Small Finance Bank is a type of bank in India which is globally known as ‘Niche Banks’.
The SFBs are registered as a public limited company under the Companies Act, 2013. They are
licensed under Section 22 of the Banking Regulation Act, 1949. Also, SFBs can be given
scheduled bank status once they commence their operations, and qualify the requirements as per
Section 42(6) (a) of the Reserve Bank of India Act, 1934. The SFBs are scaled down versions of
scheduled commercial banks, with both deposit-taking and loan making functions.Small banks
can play vital role in lending loans in small scale. Reserve Bank of India prefers to have small
banks that can serve for poor people. Small banks can extend their banking activities to the rural
masses. Reserve Bank of India also gives preference to take banking to the rural poor people. By
having small banks, India wishes to develop a network of small and focused lenders. These small
banks specifically target the low-income segment in the country. These types of small banks are
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(UGC Care Listed Journal) Vol-40 Issue-13 February 2020
similar to US community banks. These small banks undertake their banking operation as
commercial banks but in a limited scale. These small banks are an opportunity for low-income
segments but not to big borrowers. Reserve Bank of India announced 8 out of 10 Microfinance
Institutions as small finance banks in-principle. These are Au Financiers (India) Ltd, Capital
Local Area Bank Ltd, Disha Microfin Pvt. Ltd, Equitas Holdings Pvt. Ltd, ESAF Microfinance
and Investments Pvt. Ltd, Janalakshmi Financial Services Pvt. Ltd, RGVN (North East)
Microfinance Ltd, Suryoday Micro Finance Pvt. Ltd, Ujjivan Financial Services Pvt. Ltd and
Utkarsh Micro Finance Pvt. Ltd. Eight out of these 10 entities are micro-finance institutions, one
is a local area bank and one is a non-banking financial company. Ujjivan Small Finance Bank
Limited is a subsidiary of Ujjivan Financial Service Private Limited based in Bangalore and
started its operations in the city in February 2017. Ujjivan Small Finance Bank currently has
branches in 15 states. It offers a variety of financial products and services to poor people in India
who do not have access to formal banking system.
3. Review of literature
Acharya (2017) stated that the Reserve Bank of India is influential in promoting the idea
of small finance banks to make available banking services to unbanked region. It is necessary as
per RBI norms that these banks have to operate at least 25% of its branches in unbanked areas to
give financial assistance to rural poor. Banks can expand their banking outlets and build sure the
services to poor community in unbanked areas.
Bandyopadhyay (2017) stated that 75% of small finance bank loans have to be disbursed
to priority sectors. Demonetization progress affected MFI-turned-small finance banks as it
increased the amount of non-performing assets. Cash is the base for their business form and
small customers from informal sectors cannot easily acknowledge cash-less business model. By
adopting enhanced technology system and practiced employees, SFBs can achieve the RBI’s
goal to provide financial assistance to unbanked population.
Ninan (2017) stated that out of 10SFBs, 8 are from microfinance institutions and this is a
clear indication of the contributions of MFIs to financial inclusion procedure. SFBs can serve
healthier the un-served rural population by issuing small amount of credits to meet their variety
of life cycle necessities.
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(UGC Care Listed Journal) Vol-40 Issue-13 February 2020
Ray (2017) stated that small finance bank is a modern progress in the Indian banking
industry to expand financial aids among rural and semi-urban poor. They adopt differential form
of delivery apart as of scheduled commercial banks to achieve out to the needy. Small finance
banks have to extend sufficient infrastructures and skilled manpower in order to accomplish their
assigned errands.
Ravi Singh (2016)stated that the financial inclusion is the key purpose of yielding license
to set up small finance banks to offered non-banking finance companies and local area bank.
These banks comprise to hub on lending low-value customers at the base level of the society.
Morbia (2016) express that the small finance banks are permitted to carry out the
essential banking services such as accepting deposits and lend money, essentially to low-income
groups. Since functioning as banks, the interest charges can be bargain, so the low-value
customers, small and medium enterprises can have the benefit of low cost credits. Institutions,
transform into small finance banks are in a situation to comprehend the financial essentials of
rural poor. By given that bank loans, these banks assist rural population to reduce the poverty.
4. Statement of the problem
Commercial banks and other financial entities are not efficiently serving the rural
population, because of lack of perceptive the credit requirements. They are for the most part
interested in providing finance to huge and medium scale corporates and urban customers. In our
nation, greater part of the people belongs to low and middle income group in rural India, formal
banking amenities are still a scant product. Micro and small enterprises and customers
particularly from rural and semi urban areas are to a certain extent served by private financial
institutions and local money lenders. The concept of small finance bank is an inventive step
taken by policy makers to serve the un-served and under-served rural population. Small finance
banks have healthier knowledge of the financial requirements of rural community because, the
majority of these banks were functioning as MFIs and their employees have superior knowledge
about the credit needs of rural customers. In this context, the present study tries to analyze the
role of small finance banks in promoting financial inclusion.
5. Objectives of the study
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(UGC Care Listed Journal) Vol-40 Issue-13 February 2020
1. To understand the concept of small finance banks and financial inclusion.
2. To know the role of small finance banks in financial inclusion.
3. To examine the effect of small finance banks on financial inclusion.
6. Research methodology
The study is based on secondary data. To study the role of small finance banks in
promoting financial inclusion and rural population, the secondary data are collected from various
journals, publications and websites.
7. Findings
1. Ujjivan Small Finance Bankundertakes meticulous appraisal of its clients before giving them
loans. This includes examining the household income, expenses as well as indebtedness.
2. In the majority of large branches, Ujjivan Small Finance Bankhas appointed dedicated
customer care representatives. The customer care representatives have the responsibility to
collect customer feedback and respond to their queries and complaints.
3. The organization has drafted a code of conduct for its staff members. This code emphasizes
on transparent behaviour and professional conduct of staff members towards clients.
8. Suggestions
1. Government of India and RBI decided to start small finance banks as the part of financial
inclusion to ensure better banking services to every section of the society. To achieve this
objective, SFBs have to follow low-cost operations system based on the latest technological
tools.
2. Two main challenges of SFBs are talented work force and advanced technology. The existing
staff needs to be properly trained to sell new products of SFBs and take deposits. In order to
reach un-served and under-served rural areas, SFBs can adopt low-cost, mobile based
technologies.
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(UGC Care Listed Journal) Vol-40 Issue-13 February 2020
3. Ujjivan Small Finance Bank can offer financial support to small business units and micro and
small industries. In the mean time, adequate training can provide to these units as well as the
interested rural people to develop entrepreneurship skills so that they can manage their
business more effectively and efficiently.
4. Majority of customers are from the rural areas. Hence, financial literacy is another concern
faced by tUjjivan Small Finance Bank. Financial education and counseling help the rural
people to invest money productively in their ventures.
5. They will become aware of the benefits of good credit records and timely settlement of
credit. These small-valued population need to be educated about e-money and cashless
business model to reduce the use of cash as India is moving towards digital economy.
6. Many clients and some staff members were found not to be aware of declining balance
interest rate charged by Ujjivan Small Finance Bank. The organization should try to improve
this awareness.
7. System of dissemination of grievance redressal mechanism requires improvement to ensure
that all clients are aware of it and there is a mechanism to cross-check if there is satisfactory
and timely redressal of all complaints.
9. Conclusion
Small finance bank is the appropriate step taken by the Government of India and RBI to
bring the isolated un-banked and the under-banked community under the domain of formal
banking system. Most of these entities were working as MFIs for a long period of time; they are
in a better position to understand the credit needs of rural poor. Therefore, authorities can
efficiently execute micro, small and medium level of credit programmes through small finance
banks. In our country, more than half of the population belongs to low-to-middle income group
and are residents in rural area. Financial Inclusion is the major tool to assist the un-served and
underserved community for enhancing their economic and social life. So it can be restated that,
small finance banks have important role to improve the economic as well as social status of rural
area beneficiaries through financial inclusion.
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(UGC Care Listed Journal) Vol-40 Issue-13 February 2020
10. Reference
Gandhi, M M. (2013). Role of banks in financial inclusion in India: Issues, challenges and
strategies, JABERM, II, 168-169.
JeebanJyotiMohanty (2018).Leveraging small financial banks in achieving financial inclusion in
India.International Journal of Business and Management Invention. 7 (2), 8-18.
Gupte, R., Venkataramani, B., & Gupta, D. (2012).Computation of financial inclusion index for
India.Procedia-Social and Behavioral Sciences, 37, 133-149.
Dangi, N., & Kumar, P. (2013).Current situation of financial inclusion in India and its future
visions.International Journal of Management and Social Sciences Research, 2(8) 155-
166.
Soumya N, Sustainable E-Banking challenges in selected Manufacturing industries in Mysuru
city, International journal of Mechanical Engineering and Technology 9(1), 2018, pp.
229- 239
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