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SMALL FINANCE BANKS

Written by Talent KAS

Related Topics: Banking Sector, Financial Inclusion

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The Reserve Bank of India (RBI) released the draft guidelines for ‘on tap’ licensing of SFBs in the private sector.

Why ‘on tap’ licensing of SFBs?

  • On tap’ licensing will enable entities to approach the RBI for obtaining licences for small finance banks on meeting laid-down criteria.
  • Eligible entities would not have to wait for licences as it would be available on-demand basis.

What is a Small Finance Bank?

  • A small finance bank is primarily set up to 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.
  • The objectives of setting up of SBFs are to further financial inclusion and supply of credit through high technology-low cost operations.

Key Features of Draft Guidelines

Registration

SFBs shall be registered as a public limited company under the Companies Act, 2013. It will be governed by the provisions of the Banking Regulation Act, 1949 and Reserve Bank of India Act, 1934.

Eligibility

  • Existing non-banking financial companies (NBFCs), micro finance institutions and local area banks in the private sector, which are controlled by residents, can opt for conversion into small finance banks.
  • Promoter of a payments bank is eligible to set up an SFB, provided both banks come under the non-operating financial holding company (NOFHC) structure.
  • Proposals from public sector entities and large industrial house/business groups, and autonomous boards/bodies will not be entertained.

Capital

  • 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.
  • RBI allowed primary urban cooperative banks (UCBs) to convert into SFBs, provided they comply with the on-tap licencing guidelines.
  • The minimum net worth of such SFBs will be ₹100 crore and has to be increased to ₹200 crore within five years from commencement of business.
  • In view of the inherent risk of an SFB, it shall be required to maintain a minimum capital adequacy ratio of 15 per cent of its risk weighted assets (RWA) on a continuous basis.

Promoters Contribution

Promoters should hold a minimum of 40 per cent of the paid-up voting equity capital of the bank, which would remain locked in for five years from the date of commencement of the bank’s business.

Listing of SFBs

  • The central bank maintained that SFBs should be listed within three years of reaching a net worth of ₹500 crore.
  • SFBs 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.

Foreign Shareholding

The foreign shareholding in the small finance bank would be as per the extant foreign direct investment (FDI) policy for private sector banks.

[Source: Economic Times, Livemint]

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