SMALL FINANCE BANK

 

Latest Context

Recently, the central Bank revealed its decision to deny three applications for setting up Small Finance Banks because these applications were not found suitable for granting in-principle approval to set up SFBs. RBI received approximately a dozen applications under the guidelines for 'on-tap' Licensing of Universal Banks and SFBs.

Small Finance Banks

• Concept: To provide basic banking services and credit facilities to underserved sections of the population, including small business owners, micro and small industries, farmers, and the unorganized sector SFB have been established. They are regulated by RBI. For instance, Ujjivan, Utkarsh, Capital Small Finance Bank, etc.
• All regulations and prudential norms of the RBI that are applicable to existing commercial banks are also applicable to SFBs.
• Moreover, according to RBI regulations, to become a universal bank, SFB wants has to have a satisfactory track record of performance for a minimum period of 5 years.

Note:

• On-Tap Licensing: It refers to the window for obtaining a bank license from the RBI which is open all year, or, RBI will accept applications and issue licenses to banks at any time throughout the year.
• CRR and SLR: Cash Reserve Ratio (CRR), and Statutory Liquidity Ratio (SLR) are both monetary policy tools used by central banks in order to regulate and control the availability of credit in the economy. CRR means commercial banks have to hold a certain minimum amount of deposit (NDTL) as reserves with the central bank. SLR is known as the minimum percentage of deposits that a commercial bank has to maintain in the form of cash, gold or other securities.

Eligibility

• Professionals (Indian citizens)/Resident individuals, singly or jointly, each should have at least 10 years of experience in banking and finance at a senior level.
• Societies and Companies owned and controlled by residents.
• Entities like non-banking financial companies (NBFCs), microfinance institutions, local area banks and payment banks that are controlled by residents can also convert into Small Finance Banks.
• In addition, Urban Cooperative Banks (UCBs) that turn out to be SFB may convert to SFB after ensuring compliance with the guidelines.

Paid-Up Capital Requirement: The minimum paid-up voting equity capital for small finance banks shall be Rs.200 crore, except for such small finance banks which are converted from UCBs.

Mandate:

• Priority Sector Lending: As per the RBI guidelines, they have to allocate 75% of their total net credit to priority sector lending. Moreover, they will also have to ensure that 50% of their loan portfolio constitutes advances up to Rs 25 lakh.  As per the mandate, the maximum loan size and investment limit exposure to single/ group obligors will be limited to 10% and 15% of its per capita funds, respectively.

Branch Network: SFBs are required to establish a network of branches in underbanked and unbanked areas, with special emphasis on rural and semi-urban regions. Initially, they are required to have at least 25% of their branches in unbanked rural areas.

Regulation: Under the Companies Act 2013, SFBs are registered as public limited companies, and are licensed under section 22 of the Banking Regulation,1949. They are governed by Banking Regulation Act,1949 and RBI Act,1934 and other relevant statutes.

 

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