The Covid pandemic has changed our lives fundamentally and irreversibly. Suddenly an un-prepared economy and society at large had to deal with a new reality that had never been seen before. The Covid pandemic has disrupted normal activities in many sectors of the economy. From the unprecedented changes in customer behaviour, organizational models and structures, to complete closure of businesses, the repercussions have been nothing short of cruel.

Earlier, during the demonetization exercise in 2016, the Banking Industry – especially the microfinance sector suffered on count of pressure on portfolio performance. And again, the covid-19 pandemic has created challenges for the sector due to its widespread impact. However, every crisis is also an opportunity and a few winners are emerging in all spheres of life and work. In banking, those with a strong digital business model in place, are in a position to weather the storm better. Small Finance Banks are a breed of new-age banks, with no legacy of traditional models, have taken a digital-first approach to build their institution. With a higher tech-quotient, their products, processes, customer experience, staff mindset, leadership style and approach to business is more agile as compared to old-generation institutions, all of which are a great plus in the fight for survival and growth.

The Digital Mode!

Firstly, SFBs are primarily serving the unbanked and underbanked segment of India and thus staring at a large unaddressed opportunity. With the additional advantage of being Digital-first, they are in a position to acquire greater significance. In addition, the crisis has accelerated the adoption of digital by all stakeholders viz. customers, intermediaries, vendors, suppliers etc. This means that the traditional competitive advantage derived from physical branch network built over decades has reduced in relevance. Mass formalization of banking across all strata of society requires challenging some existing paradigms and creating a few new ones. As an industry expert commented – in the future, banks may not survive but banking will! And the future of banking is more digital than physical.

This pandemic has also given the microloans-focussed players the opportunity for growing the right customer segments because of the pent-up demand. The micro entrepreneurs, who need crdit to start or re-start their business, purchase machinery, equipment, material etc. represent a healthy demand.

Customer connect and Collection efficiency – The key differentiator!

Most organized microloans-focussed institutions, including Small Finance Banks, enjoy the advantage of last mile connectivity with the customers. This makes the model resilient to many socio-economic and political risks. They are able to work alongside customers to find fix to income generating activities, cash flows, connecting customers to supply chains etc. It is therefore no surprise that the collection efficiency of the microloans portfolio which had plunged to 20-25% levels in Q1 FY21 in view of the nationwide lockdown to stem the spread of the Covid-19 pandemic, bounced back to 70-75% in Jul’20 and 90-92% by Sep’20. As of March, the collection efficiency has returned to near-normal of 99%+. These institutions are also witnessing fresh lending activity at the pre-covid levels.

Path Ahead!

The Small Finance Banks cater to the base of the pyramid that has endured multiple crises over the year and has bounced back each time. The underlying foundation of micro-entrepreneurship in the country has much to contribute to the continued success and strength of the business. Since a large segment of our population is self-employed and largely in the low-income category. Such segments are generally starved of formal credit. The ecosystem of Small finance banks, a set of well-regulated entities, are in the best position to cater to this segment in a responsible and sustainable manner.


Small Finance Banks have a noteworthy part in true financial inclusion i.e. providing savings, credit, insurance, money transfer services, etc. at the grassroots where it is required the most. Though there are multiple players in the microloans landscape, India still represents a colossal opportunity for the sector. A significant portion of the population lives in the low-income band and still lacks access to credit from the formal sector thus leaving room for further expansion. The sector’s growth signifies the expanding scope of microlending in achieving financial inclusion. Given the opportunity, there is enough for everyone to drink from the pond!

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