MUMBAI: The Reserve Bank granted small bank licences to 10 applicants, most of which are engaged in microfinance, in a move seen as one of the most far-reaching initiatives on financial inclusion since bank nationalisation in the late 1960s.Among those that bagged licences are Au Financiers backed by private equity firm Warburg Pincus, Ujjivan Financial, Utkarsh Micro Finance and Janalakshmi Financial, run by a former Citibank derivatives trader.Those that didn’t make the cut include leading microfinance company SKS Microfinance, Vaya Finserv backed by Vikram Akula, once the poster boy of Indian micro lending, Dewan Housing Finance Ltd and brokerage IIFL Holdings, in which Indian-born Canadian billionaire Prem Watsa plans to raise his stake.The banks will further the agenda of financial inclusion by offering credit to small businesses and marginal farmers besides units in the unorganised sector. They will also provide avenues for savings and will be high-tech but low-cost institutions, as envisaged by the central bank."This is a big milestone for us and also for the entire microfinance industry — as many as eight MFIs (microfinance institutions) made the cut," said Govind Singh, MD & CEO, Utkarsh Micro Fin. "The challenge for almost every MFI going forward would be to raise domestic equity since, as non-banks, we had relatively easy access to foreign equity and therefore had gone for it."Microfinance companies are governed by separate laws and some of the licence winners may need to lower overseas holdings under Banking Regulations.The 10 were chosen from 72 applicants following detailed scrutiny of financial viability, business plans and other checks by three independent committees, said the regulator. Others that have got the licences include Capital Local Area Bank Ltd from Jalandhar and Disha Microfin Ltd based in Ahmedabad. "An important factor was proposed reach into unbanked areas and underserved sections of the population," said RBI . "The detailed scrutiny involved assessment of financial soundness, proposed business plan, fit and proper status based on due diligence reports received from regulators, investigative agencies, banks, etc."Small banks can take deposits and lend just like fullfledged banks. They can also trade in forex and sell financial products such as MFs and insurance. But at least half their loans should be less than .`25 lakh so that the small borrowers benefit. It can’t lend more than 10% to a single borrower and for the group it is capped at 15 per cent."It was the toughest licence to get and we got it because we scored well in our first innings," said Sanjay Agarwal, MD, AU Financiers. "We have Rs 1,000 crore of net worth. We will be converting our NBFC into a bank and will be profitable from day one." The firm is backed by Warburg Pincus and Motilal Oswal.With this, RBI Governor Raghuram Rajan has made substantial progress on his promise of differentiated banking licences, part of the agenda he unveiled on taking office in September 2013. While two full-fledged bank licences were given last year — to IDFC and Bandhan Bank — permits for payment banks were announced last month. Other items on Rajan’s to-do list include fullfledged investment banks and the subsidiarisation of foreign banks or the establishment of wholly owned local units. Bandhan Bank began operations last month and IDFC Bank is expected to start in October.Small banks will have equity capital of at least Rs 100 crore with a quarter of their branches in villages that have a population of less than 10,000, RBI’s norms stipulate. In the first five years, they will need RBI’s approval for new branches and should have a capital adequacy of 15 per cent of risk-weighted assets.Changes in EcosystemSBI sees prospects for collaboration but also expects changes in the ecosystem. "We can have a model where we can finance them and they can do the final delivery, but we are not vacating this space. The rural India space is huge, so the quality of the game will change," said SBI Chairman Arundhati Bhattacharya."Unlike some existing small banks which are capitalstarved, these small finance banks will come with deep pockets and they would scale up on the digital model. Therefore, their delivery on the microfinance front may be less costly."Janalakshmi Fin Services is capitalised at Rs 750 crore well over the threshold level, said VS Radhakrishnan, CEO. "We have presence in 19 states with a bias towards urban lending and we do not envisage any difficulty in expanding our presence in rural areas," he said.Capital Local Area Bank Director Dinesh Gupta said: "We will infuse more capital into the bank to meet the net worth requirement. We are close to Rs 100-cr net worth."Along with payment banks, this new set of lenders could pose a threat to established commercial banks, especially the state-run ones that have a dominant presence in smaller towns and villages, though a good part of rural India still remains unbanked. To be sure, some of these entities may take a while to start operations such as accepting deposits as they have to raise capital and restructure holdings to meet regulatory norms."First, we have to restructure the entity from 90 per cent foreign-owned to a majority domestic ownership," said Samit Ghosh, founder and MD of Ujjivan Financial Services. "Second, we will build a unique business model and bring in new technology to focus on the unbanked and micro-entrepreneurs. We don’t want to target the middleclass customer segment."