SFBs Seek Relief from RBI on Loan Portfolio Concentration Norms
The formal request by Small Finance Banks to adjust portfolio composition rules signals a strategic shift toward mid-market lending and institutional stability.
- SFBs are requesting a reduction in the 75% Priority Sector Lending (PSL) mandate to align closer to universal bank standards.
- Lenders seek to relax the requirement that 50% of the portfolio must consist of loans below ₹25 lakh.
- The move aims to improve portfolio diversification and reduce concentration risk in micro-segments.
- A policy shift would intensify competition between SFBs and NBFCs for mid-market and corporate assets.
The Push for Structural Flexibility in SFB Portfolios
Small Finance Banks (SFBs) have formally approached the Reserve Bank of India (RBI) to request a relaxation of the stringent prescriptions governing their loan books. At the heart of this lobbying effort are two specific mandates: the requirement to direct 75% of Adjusted Net Bank Credit (ANBC) toward Priority Sector Lending (PSL) and the rule ensuring half of the portfolio comprises small-ticket loans.
Currently, SFBs operate under a more rigorous PSL framework than universal banks, which typically face a 40% target. By seeking an easing of these norms, SFBs are looking to transition from niche micro-lenders to more versatile financial institutions. This change would allow them to deploy capital into higher-ticket segments and diversified asset classes that are currently restricted by the ₹25 lakh cap.
Addressing Concentration Risk and Margin Pressure
The primary driver for this request is the need for better risk management. The 50% cap on loans under ₹25 lakh forces SFBs to maintain a heavy focus on microfinance, small business loans, and rural credit. While this serves financial inclusion, it also creates significant concentration risk. During economic downturns or regional disruptions, these specific segments often face simultaneous stress, impacting the bank's overall Asset Quality (AQ).
Furthermore, the cost of servicing a high volume of small-ticket loans is inherently higher than managing larger exposures. By diversifying into mid-market lending, SFBs could potentially achieve better economies of scale. The ability to lend more than ₹25 lakh to a single borrower without breaching regulatory ratios would allow these banks to retain growing customers who would otherwise graduate to universal banks.
Diversification beyond micro-segments is becoming a necessity for SFBs to maintain long-term institutional stability and competitive ROA.
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Impact on the PSL Asset Market
If the RBI agrees to lower the 75% PSL target, the supply-demand dynamics of the PSL Certificate (PSLC) market will likely shift. SFBs are currently major originators of PSL-compliant assets. A reduction in their mandatory targets could mean they have more surplus PSLCs to trade, or conversely, they may pivot their originations toward non-PSL commercial assets.
For universal banks that rely on purchasing PSLCs to meet their own shortfalls, any change in SFB mandates could alter the pricing of these certificates. This creates a ripple effect across the banking system, influencing the cost of capital for sectors like agriculture and MSME.
The Competitive Landscape: SFBs vs. NBFCs
A relaxation in portfolio norms would put SFBs in direct competition with mid-sized NBFCs and private sector banks for larger ticket sizes. Currently, NBFCs often have more flexibility in their product mix, allowing them to target the 'missing middle' of the Indian economy—enterprises that require loans between ₹25 lakh and ₹5 crore.
SFBs, with their access to low-cost CASA (Current Account Savings Account) deposits, would have a distinct pricing advantage over NBFCs if allowed to compete in the same ticket-size brackets. This could lead to a consolidation of credit in the mid-market segment as SFBs leverage their banking licenses to offer more comprehensive suites of products beyond simple credit.
Regulatory Considerations for the RBI
The RBI faces a balancing act. The SFB license was specifically designed to further financial inclusion in unserved and underserved areas. Easing the 75% PSL mandate or the small-ticket cap could be perceived as a dilution of the original policy objective. However, the regulator also prioritizes the financial health and sustainability of the banking entities it oversees.
Analysts suggest that any relaxation might be graduated rather than immediate. The RBI may link the easing of norms to specific milestones, such as a bank's track record in digital transformation, its capital adequacy ratio, or its success in reaching specific geographic clusters. This would ensure that the core mission of inclusion is not abandoned while allowing banks the room to grow.
What this means for execution
For BFSI leaders, this potential shift necessitates a re-evaluation of field force deployment and credit underwriting models. If SFBs move toward larger ticket sizes, the 'high-touch' model used for micro-loans must evolve into a 'high-tech, high-touch' hybrid capable of assessing more complex business financials. Sales teams will require workflows that can handle both high-volume small loans and document-heavy mid-market originations.
To manage this transition, institutions will need robust field CRM capabilities to track diverse lead sources and ensure compliance across varying loan categories. Toolyt helps SFBs and NBFCs streamline these complex field workflows, ensuring that even as portfolio compositions shift, productivity and compliance remain consistent across the board.
Operational focus should now turn to enhancing the digital loan origination journey (LOS) to handle larger ticket sizes without increasing the turnaround time (TAT). This involves integrating more sophisticated data points for credit appraisal beyond basic KYC and bureau scores.
The transition from micro-lending to mid-market credit requires a fundamental upgrade in field execution technology and data-driven underwriting.
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Frequently asked questions
Why are SFBs asking for a change in the 75% PSL mandate?
SFBs seek to reduce concentration risk and improve portfolio diversification. Aligning closer to the 40% PSL mandate of universal banks would allow them to allocate more capital to higher-yielding or more stable non-priority sectors.
How would a change in the ₹25 lakh cap affect SFB operations?
Relaxing the 50% cap on loans under ₹25 lakh would allow SFBs to target larger MSME and mid-market clients. This enables them to retain growing customers and reduces the operational cost-to-income ratio associated with managing millions of tiny accounts.
What is the likely impact on NBFCs if these rules are eased?
NBFCs would face increased competition in the mid-market segment. SFBs have the advantage of lower-cost deposit funding, which could allow them to offer more competitive interest rates on loans above ₹25 lakh than many NBFCs.
This briefing is written by the Toolyt Pulse desk with AI assistance, based on publicly reported Indian BFSI news. Facts and figures are limited to what the cited source reports; everything else is clearly framed as analysis. We do not publish unverified numbers, forecasts presented as fact, or quotes that were not reported. Primary source: The Hindu BusinessLine Money & Banking. Spotted something inaccurate? Write to hello@toolyt.com.