New Delhi: The microfinance business will now be dominated by small finance banks (SFBs) which will bring down systematic risk but at the cost of lower returns, said India Ratings and Research (Ind-Ra).


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Of the 10 shortlisted candidates for small bank license by RBI, eight are micro finance institutions (MFIs), one mainly a commercial vehicle financier and one a local area bank.


Earlier this week, RBI granted in-principle approval to entities to start Small Finance Bank.


The total managed loan assets of the 10 SFBs was Rs 20,100 crore and balance sheet size was around Rs 22,200 crore in 2014-15, Ind-Ra said adding that MFIs that have received approval as a universal bank and SFBs, stood at 54 percent of NBFC-MFI gross loan portfolio in FY15.


Under the banking format they can provide multiple financial products including savings to the under-served individuals and MSMEs, it said.


Reserve ratios and deposit insurance will reduce systemic risk, and over time lower deposit cost could be transmitted to lower lending rates, it added.


The agency said more than 50 percent of the micro finance landscape could be out of the mandatory purview of the micro finance credit bureaus.


These institutions will, at least for the next two to three years, target the same segment as the balance NBFC-MFIs in most states, it added.


Ind-Ra further said, SFBs would need to lend to the under-banked, which means higher investment into systems/ processes and lending to individuals rather than groups, which will push up credit risk and cost, thus return on assets may decline to 1-2 percent from 2-3 percent in FY'15.


The agency estimates the microfinance sector to grow strongly at 24 percent annually over FY15-FY19. Thus the 10 players could be required to replace Rs 20,000 crore of bank loans and at an aggregate net worth of Rs 4,700 crore.


They will need to raise equity of Rs 2,000 crore and tier two capital of around Rs 1,500 crore by 2017-18, it said.