Small Finance Bank License

Reserve Bank of India has granted in-principle licence for small finance bank to ten entities.

The name of the applicants that have been granted the licence include- Au Financiers, Capital Local Area Bank , Disha Microfin, Equitas Holdings, ESAF Microfinance and Investments, Janalakshmi Financial Services, RGVN (North East) Microfinance, Suryoday Micro Finance, Ujjivan Financial Services and Utkarsh Micro Finance.
The in-principle approval granted by RBI will be valid for a period of 18 months.

How to apply for Small Finance Bank License?

Small finance bank shall be registered as a public limited company under the Companies Act, 2013 and will be licensed under Section 22 of the Banking Regulation Act, 1949 and governed by the provisions of the Banking Regulation Act, 1949 and Reserve Bank of India Act, 1934 and with other relevant Statutes and the Directives/Regulations and other Guidelines/Instructions issued by RBI and other regulators from time to time.

Reserve Bank of India wants to serve rural & semi-urban areas such as small businesses, unorganized sector, low-income households, farmers and migrant workforce through Small Finance Banks.

Small finance banks are a type of niche banks. These type of banks carrying small finance bank license provides basic banking services related to acceptance of deposits and lending. Their main aim is to provide financial services to those sections of the economy which are not being served by the other banks, such as small business units, small and marginal farmers, micro and small industries and entities of the unorganized sector.

Small Finance Banks make money by collecting money from current account & saving account depositors, fixed depositors, commercial papers, Wholesale deposits, refinancing etc. On saving account they offer interest rates between 6 to 7 % subject to conditions. On fixed deposit around 9%, interest is offered. SFBs offers two types of products such as group loans & individual loans. These products can be further divided into agricultural, education, home improvement, home purchase, livestock loans etc.

SFBs do not get a guarantee against the loan offered. In the group loans, they are offered on the joint liability. In case any member of the group does not pay than the whole group is held liable for the same.

Small Finance Banks require prior approval for the opening of bank branches from RBI. Universal banks do not require such permission for roll out a branch in the unbanked rural areas.

Small Finance Banks required to extend 75% of their Adjusted Net Bank Credit (ANBC) to the classified sectors under priority sector lending (PSL) by the RBI. Agriculture, Small scale industries, Small business/ service enterprise, Microcredit, Education loans.

What is OBJECTIVE of Small finance bank?

  • Its primary purpose is to provide an institutional mechanism for promoting rural & semi-urban savings and also providing credit for viable economic activities in local areas and provision of savings vehicles primarily to unsaved and under served sections of the population, and
  • Supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganized sector entities, through high technology-low cost operations.

What are RULES & REGULATIONS for Small finance banks?

  • Small finance bank will undertake basic banking services of acceptance of deposits and lending to unsaved and under served sections.
  • It will provide banking facilities to boost saving habits.
  •  It will mainly target small business units, marginal farmers and unorganized sector entities through high technology-low cost operations.
  • They are established as a public limited company in the private sector which is promoted either by individuals, corporate, trust or societies.
  • They are governed by the provisions of Reserve Bank of India act 1934, Banking Regulation act 1949 and other relevant statutes.
  • Small finance banks are considered as non-scheduled banks and they are not allowed to borrow funds from the Reserve Bank of India like other scheduled banks.

RBI has clarified that SFBs can convert themselves into universal banks through the transition would not be automatic and it will require regulator’s approval.

What is minimum capital adequacy requirement for Small finance bank License?

Particulars %
Minimum Capital Requirement15%
Common Equity Tier 16%
Additional Tier I1.5%
Minimum Tier I capital7.5%
Capital Conservation BufferNot Applicable
Pre-specified Trigger for conversion of AT1CET1 at 6% up to March 31, 2019, and 7% thereafter

Key CHALLENGES faced by Small finance bank?

It is not easy to maintain ideal technology platform which should benefit both the customers for ease of transactions and to the bank as a reduction in cost. Previously functioning as MFIs (Microfinance institutions), Small financial Banks have not handled deposits before. It is required for them to invest in the infrastructure which enables deposits through establishing a physical branch network to mobilize correspondent network, ATM network, and partnering with banks. Capital adequacy ratio, cash reserve ratio (CRR) and statutory liquidity ratio (SLR) will be a significant burden to manage which will result into reduced earnings until SFBs develop a substantial depositor base.

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