India awards 10 permits to create small banks to help businesses

• Micro lenders among those selected for small finance bank permit
• Small finance banks to give loans to small businesses, farmers 

MUMBAI (Reuters): India’s central bank said on Wednesday it has selected 10 financial institutions to set up separate small banks to lend to small businesses and farmers, who typically struggle to get funding from traditional lenders.

Private-equity backed Ujjivan Financial Services Ltd. and Janalakshmi Financial Services Ltd., were among the 10 granted approval to seek one of the niche small finance bank licences. Most of the others were microfinance companies that already make small loans to businesses and farmers.

Nearly half the population of India, Asia’s third-largest economy, did not have a bank account before a government program led to millions of new accounts this year.

More than 100 million people in the country work at small businesses but only about 4% of small businesses have access to institutional finance.

Setting up small banks will enable microfinance firms to increase their loan ticket size although they must ensure that half of their loan book constitutes loans of not more than 2.5 million rupees ($ 37,700).

Existing non-bank finance companies, local area banks and micro-finance institutions were eligible to apply for the permits and 72 submitted applications.

The winners will in future be able to become fully fledged banks 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.

The other institutions selected for small bank permits included Au Financiers (India) Ltd., Capital Local Area Bank Ltd and Disha Microfin Pvt Ltd.

In a separate process, last month, the RBI had named 11 companies to set up payments banks that can take deposits and remittances but cannot lend. Big telecom carriers and Reliance Industries, controlled by India’s richest man, were among those selected for the payments bank permits.