Other Bank Industry Playbook
Part of the Financial Services sector "Other Banks" on BSE captures Small Finance Banks (SFBs), Payment Banks, Regional Rural Banks, and Foreign Banks operat...
Part of the Financial Services sector
Industry Overview
"Other Banks" on BSE captures Small Finance Banks (SFBs), Payment Banks, Regional Rural Banks, and Foreign Banks operating in India. SFBs are the most investable sub-segment — purpose-built for financial inclusion with high-yield lending to underserved segments.
Key players (SFBs — primary investable segment)
| Company | Market Position | Strength | AUM |
|---|---|---|---|
| AU Small Finance Bank | Largest SFB by market cap | Vehicle + MSME lending, premium franchise | ₹85,000+ Cr |
| Equitas SFB | South India focus | Affordable housing + micro | ₹35,000+ Cr |
| Ujjivan SFB | Micro-banking leader | Mass banking, urban micro | ₹30,000+ Cr |
| Suryoday SFB | Western India focus | Micro-lending + affordable housing | ₹10,000+ Cr |
| Fino Payments Bank | Payment bank listed | Technology-led financial services | N/A |
Why this segment matters
- SFBs serve the underbanked 300 million — massive addressable market
- Higher NIMs (5-8%) vs traditional banks (3-5%) due to high-yield lending
- Financial inclusion mandate creates social + commercial alignment
- Potential universal bank upgrade path (AU SFB likely first)
What you will learn
- Industry Overview: SFB licensing, mandate, and business model economics
- Key Metrics: NIM, cost-to-income, GNPA, yield on advances, and deposit growth
- Competitive Landscape: SFB vs NBFC vs banks, niche positioning
- Risks: Asset quality in micro-lending, concentration, regulatory constraints
- Valuation: Growth-adjusted P/B and transformation premium
Quick navigation
| Lesson | Focus |
|---|---|
| Industry Overview | SFB license, inclusion mandate, high-yield economics |
| Key Metrics | NIM (5-8%), cost-to-income, GNPA, opex ratio |
| Competitive Landscape | SFB vs NBFC vs banks, universal bank aspiration |
| Risks & Red Flags | Micro-lending cycles, geographic concentration, ALM |
| Valuation Framework | Growth P/B, NBFC-to-bank transformation premium |
Start here
Begin with the Industry Overview to understand the SFB mandate and high-yield model, then use Key Metrics to screen for quality within this high-risk, high-reward segment.
1. Other Bank — Industry Overview
Other Bank — Small Finance Banks, Payment Banks & Foreign Banks (Financial Services sector)
What you will learn
How Small Finance Banks operate, their RBI licensing mandate, and why they earn higher NIMs than traditional banks while serving the underbanked.
Small Finance Banks — The dominant investable segment
SFBs were created by RBI in 2015-16 to serve the unbanked and underbanked — micro-borrowers, small farmers, and MSMEs who were too small for traditional banks but too expensive for MFIs alone.
The license mandate
| Requirement | Detail |
|---|---|
| 75% lending to PSL | Agriculture, micro-enterprise, affordable housing |
| 50% loans < ₹25 lakh | Must serve small-ticket borrowers |
| 25% branches in unbanked | Rural/semi-urban presence mandatory |
| Full banking operations | Deposits, lending, cards, insurance distribution |
| Capital requirement | Minimum ₹200 Cr net worth |
The business model
SFB Revenue = High Yield on Advances (14-20%) − Cost of Funds (6-8%) = NIM 5-8%
Why NIMs are so much higher
| Factor | Traditional Bank | SFB |
|---|---|---|
| Avg loan ticket | ₹10-50 lakh | ₹1-5 lakh |
| Yield on advances | 8-10% | 14-20% |
| Cost of funds | 4-5% | 6-8% |
| NIM | 3-4% | 5-8% |
| Credit cost | 0.5-1.5% | 1.5-3.0% |
| Net NIM | ~2.5% | ~4% |
The trade-off
Higher NIM comes with higher credit cost. The key question: does the NIM premium more than compensate for higher defaults? For well-run SFBs (AU, Equitas), the answer is yes.
Payment Banks
| Feature | Detail |
|---|---|
| License | Can accept deposits (max ₹2 lakh), no lending |
| Revenue model | Transaction fees, float income, distribution |
| Key players | Paytm, Airtel, Fino, India Post |
| Investment case | Limited — cannot lend, thin margins |
Foreign Banks in India
| Feature | Detail |
|---|---|
| Model | Branch banking (limited expansion) |
| Focus | Corporate treasury, trade finance, wealth management |
| Players | Citi (sold retail to Axis), HSBC, Standard Chartered |
| Investment case | Limited domestic listings; niche |
🗣️
"SFB ka business simple hai — bade bank ₹50 lakh se neeche loan nahi dena chahte, MFI ke paas deposit base nahi hai. SFB dono ko bridge karta hai. High yield + deposits = powerful combo."
Growth drivers for SFBs
- Massive underbanked market: 300M+ Indians without formal credit access
- High-yield lending: 14-20% yields vs 8-10% for traditional banks
- CASA building: Young franchises growing deposits at 25-40% CAGR
- Universal bank aspiration: Upgrading to universal bank license (removing PSL constraints)
- Cross-sell opportunity: Insurance, mutual funds, payments to existing borrower base
✅ Checklist
- ○I understand the SFB mandate (75% PSL, 50% small-ticket loans)
- ○I know SFBs earn 5-8% NIM vs 3-4% for traditional banks
- ○I recognize the trade-off: higher NIM but also higher credit cost
- ○I differentiate SFBs (investable) from Payment Banks (limited model)
Key takeaway
SFBs bridge the gap between MFIs (no deposits) and banks (won't serve small borrowers). Their high-yield, high-engagement model generates 5-8% NIMs — but with correspondingly higher credit costs. The best SFBs (AU, Equitas) are building deposit franchises that will eventually support universal bank ambitions.
2. Other Bank — Key Metrics
Other Bank — Small Finance Banks (Financial Services sector) The 5 metrics that matter for SFBs — NIM, costtoincome, GNPA, deposit growth, and opex ratio. Th...
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3. Other Bank — Competitive Landscape
Other Bank — Small Finance Banks (Financial Services sector) How SFBs compete with NBFCs, MFIs, and traditional banks — and why AU SFB stands apart from the...
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4. Other Bank — Risks & Red Flags
Other Bank — Small Finance Banks (Financial Services sector) The unique risks facing SFBs — microlending cycles, geographic concentration, ALM mismatches, an...
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5. Other Bank — Valuation Framework
Other Bank — Small Finance Banks (Financial Services sector) How to value SFBs using growthadjusted P/B, the transformation premium concept, and when to pay...
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