MBF Sp 2025-wl-7212-Private Equity Sponsoring Big Dreams Of The Indian Small Finance Banks: Can The Model Be Trusted?

Small finance banks (SFBs) were set up in 2015 when RBI issued licenses to ten entities which included eight microfinance institutions. Each of these ten entities were backed by a private equity (PE) investor, who through equity facilitated the transformation of these non-banks into banks. However, PE has the potential to harm these SFBs since timely exits with profits is the ultimate objective of PE. This article aims at understanding - first, the role played by PE in the process of SFB licensing and second- the anatomy of investments and exits made by PE in SFBs. The purpose is to highlight the dangers if any of such investments. We found that PE was instrumental in not just enabling these SFBs to get the license but also in providing additional capital support post licensing. The data, which was sourced from Venture Intelligence, revealed that most of the amount invested by PE between 2005 and 2020 in SFBs is still unexited and has come largely through foreign investors. There is a strong possibility that SFBs might be engaging in high-risk activities under the influence of profit-minded PE and therefore we recommend a dedicated and comprehensive framework to regulate PE activity in SFBs.