SFBs Propose To Shift To Individual Financing

SMALL FINANCE BANKS have been operating in India, for quite some time. These banks have a different lending strategy to cater to the needs of Micro and small Entrepreneurs. They mainly rely on Group lending.

What is the main Risk Associated with Group Lending?

SFBs resort to Group Financing, which has resulted in more challenges and risks associated with recoveries.  Few such risks are:

  • Group Lending is coupled with additional costs which includes
    • group formation costs,
    • training of borrowers on group procedures,
    • higher graded supervision and also
    • higher repayment installment frequencies.
  • In turn, these costs result in increased interest rates on such micro credit loans, which ultimately leads to enhanced repayment risk.
  • Other risks involved is the limit in such group lending is, normally limits are used up to the optimum level and thus affects the repayment, since the incentive of future credit will no longer be available, due to a single member’s default in repayment.
  • Around 90 per cent of the group lending portfolio is unsecured.

Following are the challenges faced by these SFBs, who in turn have now decided to shift to individual lending from the present Group lending.

  1. The Farm Loan waiver, recently announced by several State Governments
  2. Increasing delinquency rates in the micro lending sector, which has now risen to 10 per cent as compared to the rate of one to two percent before note ban?

Few of the SFBs have now taken a stand to shift to Individual lending in the following manner:

Sr. No.

Bank Details


ESAF Small Finance Bank, Kerala

(completed six months of operation)

Looks to reduce group lending portfolio from 95% to 75% by the end of this year.
2 Suryodaya Samll Finance Bank

(completed six months of operation)

Looks to reduce group lending portfolio to 75% by the end of this year.
3 Fincare (completed six months of operation) Looks to reduce group lending to 50% in three to four years.

In general SFBs are also looking forward to roll out products like Loans for vehicles, Home Loans and Loans to shop keepers and other retail categories.

As on 30th June 2017, Bandhan Bank’s gross NPAs rose to Rs. 175 crore accounting for 0.82% against 0.22% in the same period during last year.  Also, HDFC Bank saw its NPA ratio rising to 1.24% for the June quarter from 1.04 % in the corresponding quarter last year.

Author: Admin Bankedge

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