Small Finance Banks Urge RBI to Ease Loan Cap and Allow Co-Lending

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AuthorWhalesbook News Team|Published at:
Small Finance Banks Urge RBI to Ease Loan Cap and Allow Co-Lending
Overview

Small finance banks (SFBs) have requested the Reserve Bank of India (RBI) to relax two key regulations. They want the maximum loan size limit to be increased from ₹25 lakh to ₹50 lakh and to be allowed to participate in co-lending arrangements. These proposed changes aim to help SFBs diversify their loan portfolios further beyond microfinance and reach a wider customer base, including micro and small medium enterprises, supporting their growth and financial inclusion objectives.

Small Finance Banks (SFBs) in India have formally approached the Reserve Bank of India (RBI) with proposals to modify certain regulatory requirements. The SFBs are seeking an increase in the cap on individual loan sizes from the current ₹25 lakh to ₹50 lakh. This limit was originally set by the RBI in 2014. Additionally, they are requesting permission to engage in co-lending activities, a facility that currently excludes them despite recent relaxations by the RBI in August 2025 for other entities.

These requests stem from discussions held in September, where SFBs identified business constraints. The banks highlighted their rapid growth, with deposit and advances growing at a Compound Annual Growth Rate (CAGR) significantly higher than the industry average between fiscal years 2022 and 2025. The RBI has recently reduced the priority sector lending requirement for SFBs, which is expected to encourage diversification away from microfinance. SFBs argue that allowing co-lending and increasing the loan cap will help them serve a broader market, particularly micro and small medium enterprises, thereby fulfilling their mandate of financial inclusion.

Impact:
This news can significantly impact the operational capacity and growth trajectory of small finance banks. Allowing co-lending and higher loan limits could enable them to compete more effectively, access a larger pool of borrowers, and potentially improve profitability. For investors, this could lead to enhanced performance for SFB stocks. The impact on the broader Indian financial sector would be positive, fostering more inclusive lending.
Rating: 7/10

Difficult Terms:
Small Finance Banks (SFBs): Banks licensed by the RBI to provide financial inclusion services to unserved and underserved segments of the population.
Reserve Bank of India (RBI): India's central bank, responsible for monetary policy, regulation, and supervision of the banking system.
Loan Portfolio: The total sum of money lent out by a bank or financial institution, along with associated interest.
Co-lending: A model where banks and non-banking financial companies (NBFCs) jointly lend to borrowers, sharing risks and rewards.
Microfinance: The provision of financial services such as loans, savings, and insurance to low-income individuals or micro-enterprises.
Priority Sector Lending (PSL): Lending by banks to specific sectors that the government considers a priority for economic development, such as agriculture, MSMEs, and housing.
Adjusted Net Bank Credit (ANBC): A measure used by RBI to calculate certain regulatory requirements, essentially the bank's total credit minus certain deductions.
Credit Equivalent of Off-Balance Sheet Exposures (CEOBE): A measure of the credit risk associated with financial instruments not directly appearing on a bank's balance sheet.
Micro, Small and Medium Enterprises (MSMEs): Businesses classified based on investment and turnover, crucial for economic growth and employment.

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