Small Finance Banks In India

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Small finance banks are a type of niche banks in India. Banks with a small finance bank license can provide basic banking service of acceptance of deposits and lending.

Union Budget 2014-2015 presented on July 10, 2014, the Finance Minister announced that: “After making suitable changes to current framework, a structure will be put in place for continuous authorization of universal banks in the private sector in the current financial year. RBI will create a framework for licensing small banks and other differentiated banks. Differentiated banks serving niche interests, local area banks, payment banks etc. are contemplated to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force”.

Accordingly, the draft guidelines for licensing of Small Banks in the private sector were formulated and released for public comments by RBI on July 17, 2014.

While preparing these guidelines, the Reserve Bank recognized the need for an explicit policy on banking structure in India keeping in view the recommendations of the Committee on Banking Sector Reforms (Chairman: Shri M. Narasimham) (1998), Committee on Financial Sector Reforms (Chairman: Dr. Raghuram G. Rajan) (2009) and other viewpoints.

According to RBI, the objectives of setting up of Small Finance Banks will be to further financial inclusion by (a) provision of savings vehicles, and (ii) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, through high technology-low cost operations.

Eligible promoters: Resident individuals/professionals with 10 years of experience in banking and finance; and companies and societies owned and controlled by residents will be eligible to set up small finance banks. Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents can also opt for conversion into small finance banks. Promoter/promoter groups should be ‘fit and proper’ with a sound track record of professional experience or of running their businesses for at least a period of five years in order to be eligible to promote small finance banks.

Scope of activities:

  • The small finance bank shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
  • There will not be any restriction in the area of operations of small finance banks.

Capital requirement:

  • The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore.
  • Promoter’s contribution: The promoter’s minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40 per cent and gradually brought down to 26 per cent within 12 years from the date of commencement of business of the bank.
  • Foreign shareholding: The foreign shareholding in the small finance bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.

Prudential norms :

  • The small finance bank will be subject to all prudential norms and regulations of RBI as applicable to existing commercial banks including requirement of maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). No forbearance would be provided for complying with the statutory provisions.
  • The small finance banks will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.
  • At least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs. 25 lakh.

Transition path: If the small finance bank aspires to transit into a universal bank, such transition will not be automatic, but would be subject to fulfilling minimum paid-up capital / net worth requirement as applicable to universal banks; its satisfactory track record of performance as a small finance bank and the outcome of the Reserve Bank’s due diligence exercise.

Procedure for application: In terms of Rule 11 of the Banking Regulation (Companies) Rules, 1949, applications shall be submitted in the prescribed form (Form III) to the Reserve Bank of India, Mumbai. In addition, the applicants should furnish the business plan and other requisite information as indicated. Applications will be accepted till the close of business as on January 16, 2015. After experience gained in dealing with small finance banks, applications will be received on a continuous basis. However, these guidelines are subject to periodic review and revision.

On 17 September 2015, The Reserve Bank of India (RBI) given provisional licenses to ten entities who would have to convert into small finance banks within one year. Capital Small Finance Bank was the first small finance bank to begin operations, opening with 47 branches on 24 April 2016. The names of the licensees are as below:

Original Promoter Commenced Bank Name Headquarters
Ujjivan Financial Services Pvt Ltd 1 February 2017 Ujjivan Small Finance Bank Bangalore
Janalakshmi Financial Services Pvt Ltd 29 March 2018 Jana Small Finance Bank Bangalore
Equitas Holdings Pvt Ltd 5 September 2016 Equitas Small Finance Bank Chennai
Au Financiers India Ltd 19 April 2017 AU Small Finance Bank Jaipur
Capital Local Area Bank Ltd 24 April 2016 Capital Small Finance Bank Jalandhar
Disha Microfin Pvt Ltd 21 July 2017 Fincare Small Finance Bank Bangalore
ESAF Microfinance 10 March 2017 ESAF Small Finance Bank Reg: Chennai, Corp: Thrissur
RGVN North East Microfinance Ltd 17 October 2017 North East Small Finance Bank Guwahati
Suryoday Microfinance Pvt Ltd 23 January 2017 Suryoday Small Finance Bank Navi Mumbai
Utkarsh Microfinance Pvt Ltd 23 January 2017 Utkarsh Small Finance Bank Varanasi

Latest in 2018: Recently, RBI said urban cooperative banks (UCBs) with minimum net worth of Rs. 50 crore and maintaining capital to risk (weighted) assets ratio of 9 per cent and above, are eligible to apply for voluntary transition to Small Finance Bank (SFB).

Under its on-tap scheme for voluntary transition, the promoters should submit applications along with requisite documents and information relating to the general body resolution by a two-thirds majority and authorising the board of directors to take steps for the transition. The general body resolution also has to identify and approve the promoters.

The promoter has to submit a no-objection letter from the Central Registrar/Registrar of Co-operative Societies to the transition and transfer of assets and liabilities to the banking company incorporated by the promoters with the approval of the RBI.

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