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RBI released Guidelines for Licensing of Small Finance Banks in the Private Sector

Nov 28, 2014 10:00 IST

The Reserve Bank of India on 27 November 2014 issued Guidelines for Licensing of Small Finance Banks in the Private Sector. As per the issued guidelines, the minimum paid-up equity capital for small finance banks shall be 100 crore rupees.

But the licenses will be granted after the applicants fulfill the necessary ‘fit and proper’ criteria, among other conditions with a sound track record of professional experience or of running their businesses for at least a period of five years. Those interested, would need to apply before 16 January 2015 for first round of such permits.


These norms for payment banks and small finance banks would allow mobile firms and supermarket chains, among others, to enter the banking arena to cater to individuals and small businesses. The move aims at deepening financial inclusion and boost saving habits.
 

Key features of the Small Finance Bank guidelines are:
i. Objectives: The objectives of setting up of small finance banks will be beneficial in financial inclusion by
a) Provision of savings vehicles
b) 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
ii. Eligible promoters
a) Resident individuals/professionals carrying 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.
b) 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.
iii. 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 percent and gradually brought down to 26 percent within 12 years from the date of commencement of business of the bank.
iv. 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.
v. Prudential norms
a) 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.
b) The small finance banks will be required to extend 75 percent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.
c) At least 50 percent of its loan portfolio should constitute loans and advances of upto 25 lakh rupees.


Background
Union Finance Minister Arun Jaitley in the Union Budget 2014-15 presented on 10 July 2014 announced that a structure will be put in place for continuous authorisation of universal banks in private sector in the current financial year; it will be put forward after making suitable changes in current framework. Framework of licensing small banks and other differentiated banks will be created by RBI.

 

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