Small Finance Bank License

What is the procedure to apply for License of Small Finance Bank?

Small finance bank is registered as a public limited company under the Companies Act, 2013 is licensed under Section 22 of the Banking Regulation Act, 1949 as well as the provisions of the Banking Regulation Act, 1949 and Reserve Bank of India Act, 1934 governs them.  RBI and other regulators from time to time issue the rules and regulations and other Guidelines/Instructions/ responsibilities for such Small Finance Bank.

Through the development of such Small Finance Banks, Reserve Bank of India (RBI) aims at serving the rural & semi-urban areas such as small businesses, unorganized sectors, households with low income, farmers and migrant workforce.

Such Banks are considered as a niche banks and often deal with the basic activities of accepting deposits and lending money. Sections which are not being served by other banks are served by such Small Finance Banks by providing financial services; such sections are small business units, small and marginal farmers, micro and small industries and entities with unorganized sector.

Through receiving money from current account & investment plan depositors, fixed depositors, corporate records, bulk deposits, refinancing, etc. Small finance banks are making money. 6 to 7 percent of interest rates are provided by Small Finance Banks on savings account 9 percent; interest is paid on fixed deposits and subjected to certain conditions. Group loans & Personal loans are the two forms of products offered by the Small Finance Banks. The further sale of such goods to agriculture, schooling, home improvement, home purchase, livestock loans, etc. is carried out by the Small Finance Banks.

Loans are offered without guarantee by the Small Finance Banks. Joint liability is applied in case of sanction of group loans. The entire group would be liable in case of default in payment by any of the member of the group.

RBI approval is required in case Small Finance Banks want to open bank branches. RBI approval is not required by the Universal banks for opening a branch in the unbanked rural areas.

75% of their Adjusted Net Bank is required to be extended by Small Finance Banks Credit (ANBC) to the classified sectors under priority sector lending (PSL) by the Reserve Bank of India (RBI).

What is the aim of Small Finance Bank?

  • In order to encourage the rural & semi-urban savings and to provide credit facilities to perform various economic activities in backward areas and provision of savings vehicles primarily to unsaved and underserved sections of the population, and
  • Using high-tech low-cost operations, Small Finance Banks offer credit facilities to small business units; small and marginal farmers; micro and medium industries; and other unorganized sector organizations to assist them in conducting out their business transactions.

Which rules and regulations have been framed for Small finance banks?

  • Only basic banking services shall be provided by Small Finance Banks such as acceptance of deposits and lending of money to underserved sections.
  • Banking facilities are provided by such banks in order to increase the saving habits and abilities of the people.
  • The main focus of such banks is to serve the banking facilities through the use of high technology- low cost operations to small business units, marginal farmers and unorganized sector entities.
  • Such banks are either promoted by the individuals, corporate, trust or societies and are incorporated as a public limited company.
  • The provisions of Reserve Bank of India Act 1934, Banking Regulation Act 1949 and other relevant statutes govern such Small Finance Banks.
  • Small finance banks are non-scheduled banks and are not permitted to borrow the funds from the Reserve Bank of India like other scheduled banks.

Small Finance banks are allowed to get themselves converted into universal banks. The process of conversion shall be automatic through transition and it will require approval from the regulator.

What minimum capital requirements are required to be complied by Small finance bank?

  • Minimum paid-up equity capital for small finance banks shall be Rs. 100 Cr.
  • Minimum capital adequacy ratio of 15 % of its risk weighted assets (RWA) on a continuous basis, subject to any higher percentage as may be prescribed by RBI from time to time.
  • Tier I capital should be at least 7.5 % of Risk Weighted Assets (RWAs).
  • Tier II capital should be limited to a maximum of 100 % of total Tier I capital.
  • As small finance banks are not expected to deal with sophisticated products, the capital adequacy ratio will be computed under Basel Committee’s standardized approaches.

What main challenges are faced by Small finance bank?

1. Maintaining systematic technology platform which should benefit both the customers and banks, benefits to customers as ease of transactions and banks as a reduction in cost is not easy.

2. Small Finance Banks have to bear the incremental cost of infrastructure, human resources and organizational transformation. Some of the areas which might entail high costs are: Upgrade of Management Information System and loan origination systems to a core banking solution, establishing risk management and treasury functions, developing savings products, managing the transformation from a credit only institution to a diversified financial institution, hiring new staff, training and optimum utilisation of existing staff and other infrastructure costs.

3. Managing the ratios such as Capital adequacy ratio, cash reserve ratio (CRR) and statutory liquidity ratio (SLR) will be a significant burden on Small Finance Banks.