Self Account Management

Small Finance Bank – 5 Main Disadvantages

What is the RERA (Rural Credit Enhancement) Regulations for Small Finance Bank?

Because of the low population of the rural segment of India and the absence of formal financial services for an important segment of the rural population, encouraging financial inclusion

Small Finance Bank – 5 Main Disadvantages

has always been an important priority for the government.

The RCE Regulations, which is implemented by the Reserve Bank of India, are designed to make it easy for small finance banks to extend credit to rural people.

These regulations include a number of measures designed to facilitate small banks’ access to credit, such as the introduction of the RCE scheme.

The basic idea behind the RCE Scheme is that small finance banks provide more than one facility to their clients – sometimes the same facility, sometimes different facilities.

This means that a single lender can have more than one facility for the same client.

If the bank provides more than one service, it may be able to charge a higher rate of interest for its clients.

The RCE scheme was introduced so as to help the small finance banks expand their reach to a wider segment of their clientele.

The scheme provides rural people with more than one facility at lower interest rates, which they may not otherwise be able to get at.

Thus, even though the bank may offer a single facility, it can give multiple services to its rural customers at reduced rates.

The advantage of this is that rural people with good credit records can benefit from these services.

The fact that these facilities are available at low rates means that they will be able to afford the services provided.

In contrast, in case of a traditional bank, the borrowers will not have access to such facilities if they have poor credit ratings.

Thus, both the banks and rural borrowers are benefiting from the RCE Scheme.

However, despite the benefits of the scheme to the rural borrowers, there are certain disadvantages that may be encountered.

The first disadvantage is that the banks that are providing these services will have a competitive advantage over smaller banks, especially those operating in the rural areas.

Secondly, there will be less competition among the smaller banks, and therefore, the banks serving rural people will be forced to give loans at higher rates.

Thirdly, the small rural customers may feel pressured to use credit facilities provided by the banks, since the larger banks may be seen as a credible financial partner.

The fourth disadvantage is that the larger the bank becomes, the more attractive it becomes, and the larger the bank becomes in the eyes of the rural population.

Therefore, the smaller rural banks who are also operating in the rural areas will find it difficult to get the same advantages that the larger banks have.

This disadvantage can be overcome by the RCE scheme.

To do so, it must be able to offer competitive rates for the rural customers.

The fifth disadvantage is that the RCE scheme does not have many benefits for the small rural banks that cannot be found in the larger banks.

For example, RCE schemes do not have a branch network that the larger banks have.

The small rural banks may not find it easy to get loans because they cannot afford to buy their own branches, as it is a very costly process.

There are also chances that the rural borrowers may find the RCE scheme not feasible as they may not have the necessary infrastructure to cater to the needs of rural clients.

For example, the rural client may not be comfortable with the process of applying for loans from the bank offices located outside the city.

If the bank cannot provide the necessary paperwork or financial forms, then the bank would not be able to provide the services it requires.

Some companies that offer loans to rural people in the United Kingdom also offer services that may not be offered by the bigger banks.

These services include but are not limited to, loan origination, processing and other related clerical tasks.

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