SMALL FINANCE BANKS

INTRODUCTION: –

Small Finance Banks are the financial institutions which provide financial services to the unserved and unbanked region of the country.

 REGISTRATION, LICENSING AND REGULATIONS: –

• The small finance bank shall be registered as a public limited company under the Companies Act, 2013.
• Small Finance Banksare 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;
  • Other relevant Statutes and the Directives, Prudential Regulations and other Guidelines/Instructions issued by Reserve Bank of India (RBI) and other regulators from time to time.
• SFBs will be given scheduled bank status once they commence their operations, and found suitable as per Section 42 of the Reserve Bank of India Act, 1934.

ELIGIBLE PROMOTERS: –

(a) Eligibility Criteria:

• Resident individuals/professionals with 10 years of experience in banking and finance.
• 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.

(b) ‘Fit and Proper’ criteria:

• Promoters / Promoter Groups1 should be ‘fit and proper’ in order to be eligible to promote small finance banks.
• RBI would assess the ‘fit and proper’ status of the applicants on the basis of their past record of sound credentials and integrity; financial soundness and successful track record of professional experience or of running their businesses, etc. for at least a period of five years.

CAPITAL REQUIREMENT:–

The minimum paid-up equity capital for small finance banks shall be Rs. 200 crore.

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.

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.
• 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.
  • After three years from the date of commencement of operations of the bank, requirement for prior approval from the Reserve Bank will no longer apply and the bank will be governed by the extant norms as applicable to scheduled commercial banks.
• The small finance bank can also become a Category II Authorised Dealer in foreign exchange business for its clients’ requirements.
• There will not be any restriction in the area of operations of small finance banks.

CORPORATE GOVERNANCE:-

• The Board of the small finance bank should have a majority of independent Directors
• The bank should comply with the corporate governance guidelines including ‘fit and proper’ criteria for Directors as issued by RBI 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.

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 Chief General Manager, Department of Banking Regulation, Reserve Bank of India, 13th Floor, Central Office Building, Mumbai – 400 001. In addition, the applicants should furnish the business plan and other requisite information as indicated.

PROCEDURE FOR RBI DECISIONS:-

• An External Advisory Committee (EAC) comprising eminent professionals like bankers, chartered accountants, finance professionals, etc., will evaluate the applications.
• The decision to issue an in-principle approval for setting up of a bank will be taken by the Reserve Bank. The Reserve Bank’s decision in this regard will be final.
• The validity of the in-principle approval issued by the Reserve Bank will be eighteen months.
• The names of applicants for bank licenses will be placed on the Reserve Bank’s website.