Former RBI Governor C. Rangarajan has urged regulators to create a new incentive framework for Small Finance Banks, arguing that consistent operational performance should be the key metric for granting universal banking licenses. He highlighted the need for policy support to expand the sector, citing Equitas Small Finance Bank’s recent recovery as an example of operational success.
Former Reserve Bank of India Governor C. Rangarajan has called for a significant policy review to support the growth of the Small Finance Bank (SFB) sector in India. Speaking during a recent visit to the new corporate headquarters of Equitas Small Finance Bank in Chennai, Rangarajan noted that with only 11 such banks currently operating across the country, the existing incentive structure is insufficient to foster the necessary expansion of this banking segment.
The core of Rangarajan’s proposal centers on the transition of these specialized banks into universal banks. He suggested that the path to obtaining a universal banking license should be clearly linked to a bank’s operational track record. In his view, regulators should prioritize a bank's history of maintaining performance benchmarks and regulatory adherence when evaluating such applications, rather than relying on other criteria. This would create a predictable pathway for successful small lenders to graduate to a broader banking license.
Equitas Small Finance Bank has been noted for its recent financial turnaround. The bank reported a profit of ₹184 crore for the first quarter of the 2027 fiscal year, marking a sharp recovery compared to the loss of ₹224 crore recorded in the same period a year earlier. Furthermore, the bank’s gross advances rose by 27 per cent year-on-year to reach ₹47,641 crore, while deposits grew by 10 per cent to ₹48,976 crore, reflecting an increase in operational scale.
Despite these growth metrics, the sector faces distinct operational challenges. Investors should note that Small Finance Banks, including Equitas, operate in an environment where profit margins are under pressure due to elevated funding costs and high competition for retail deposits. While the bank has improved its profitability, its ability to maintain healthy margins will depend heavily on its capacity to manage the rising cost of borrowing and asset quality risks, particularly as it expands its loan book.
Beyond the SFB segment, Rangarajan also raised concerns regarding the consolidation of Regional Rural Banks (RRBs). He argued that merging these institutions into single state-level entities risks diluting the localized focus that was central to their original mission. According to his view, this consolidation may reduce their effectiveness in addressing the specific socio-economic needs of the regions they serve.
For investors and market observers, the next important development will be how the Reserve Bank of India responds to these suggestions regarding the SFB framework. Monitoring future regulatory policy updates and the bank's ability to navigate margin pressure while scaling operations will be essential for understanding the long-term potential of the sector.