Details about Small Finance Banks in private sector banks

Small Finance Banks in the Private Sector

1.      Objectives: 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.

2.      There will not be any restriction in the area of operations of small finance banks.

3.      The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore.

4.      The promoter's minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40 per cent. The promoter’s stake should be brought down to 30 per cent of the paid-up equity capital of the bank within a period of 10 years, and to 26 per cent within 12 years from the date of commencement of business of the bank. If the initial shareholding by promoter in the bank is in excess of 40 per cent, it should be brought down to 40 per cent within a period of five years. The promoter's minimum contribution of 40 per cent of paid-up equity capital shall be locked in for a period of five years from the date of commencement of business of the bank.

5. 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.
6. 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.

7.      At least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs. 25 lakh.

8. The validity of the in-principle approval issued by the Reserve Bank will be eighteen months.

9.      The small finance bank shall be registered as a public limited company under the Companies Act, 2013. It will be licensed under Section 22 of the Banking Regulation Act, 1949 and governed by the provisions of the Banking Regulation Act, 1949; Reserve Bank of India Act, 1934; Foreign Exchange Management Act, 1999; Payment and Settlement Systems Act, 2007; Credit Information Companies (Regulation) Act, 2005; Deposit Insurance and Credit Guarantee Corporation Act, 1961. The small finance banks will be given scheduled bank status once they commence their operations, and found suitable as per Section 42 (6) (a) of the Reserve Bank of India Act, 1934.

10.  It can also undertake other non-risk sharing simple financial services activities, not requiring any commitment of own fund, such as distribution of mutual fund units, insurance products, pension products, etc. with the prior approval of the RBI and after complying with the requirements of the sectoral regulator for such products. The small finance bank can also become a Category II Authorised Dealer in foreign exchange business for its clients’ requirements. It cannot set up subsidiaries to undertake non-banking financial services activities.

11.  The annual branch expansion plans of the small finance banks for the initial five years would need prior approval of RBI. The annual branch expansion plans should be in compliance with the requirement of opening at least 25 per cent of its branches in unbanked rural centres (population upto 9,999 as per the latest census).

12.  The small finance bank will be required to use the words “Small Finance Bank” in its name in order to differentiate it from other banks.

13.  After the small finance bank reaches the net worth of Rs.500 crore, listing will be mandatory within three years of reaching that net worth. However, small finance banks having net worth of below Rs.500 crore could also get their shares listed voluntarily, subject to fulfilment of the requirements of the capital markets regulator.

14. The small finance bank cannot be a Business Correspondent (BC) for another bank. However, it can have its own BC network.
15.  The small finance banks will come under the purview of RBI’s Banking Ombudsman Scheme, 2006.

16.  The small finance bank may choose to continue as a differentiated bank. If it aspires to transit into a universal bank, such transition will not be automatic, but would be subject to it applying to RBI for such conversion and fulfilling minimum paid-up capital / net worth requirement as applicable to universal banks; its satisfactory track record of performance as a small finance bank for a minimum period of five years and the outcome of RBI’s due diligence exercise. 

17.  The Reserve Bank of India in-principle granted licences to 10 applicants to set up small finances banks, that are all mainly microfinance and small finance companies. The 10 banks were chosen from the 72 applications received. 

18. Maximum loan size would be 10% of capital funds to single borrower, 15% to a group.

19.  Firms with differentiated banking licences face operational restrictions in terms of geographical reach and product variety.

20.  Differentiated banking licences allow for the creation of a variety of small banks that target a specific region or population.