On Tap Licence for Small Finance Banks

The Reserve Bank of India (RBI) is considering to issue “on tap” licensing for small finance banks.

The on-tap licensing will allow entities to approach the RBI for obtaining licences for small finance banks on meeting laid-down criteria. RBI wants to cash in the potential of small finance banks in promoting banking facilities for small borrowers and encourage competition.

Small Finance Banks

The Small Finance Banks were set up with an objective to further financial inclusion by providing:

• Basic banking facilities to the unbanked and thereby boosting saving habits.
• 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.

Features of the Small Finance Banks

• Resident individuals/professionals with 10 years of experience in banking and finance or Companies and societies owned and controlled by such 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) are also eligible to opt for conversion into small finance banks.
• The small finance banks are focused towards unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
• The minimum paid-up equity capital for small finance banks is Rs. 100 crore.
• The promoter’s minimum initial contribution to the paid-up equity capital of small finance bank should be at least be 40 per cent and must be gradually brought down to 26 per cent within 12 years from the date of commencement of business.
• The foreign shareholding in the small finance banks are subjected to the Foreign Direct Investment (FDI) policy for private sector banks.
• The small finance banks are subjected to all the norms and regulations of RBI as applicable to existing commercial banks including the requirement of maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
• Small finance banks are required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) for the priority sector lending.
• At least 50 per cent of the loan portfolio must comprise of loans and advances of up to Rs. 25 lakh.

There would be no automatic transition into a universal bank. The transition will be subject to fulfilling minimum paid-up capital / net worth requirement as applicable to universal banks; its satisfactory track record of performance as a small finance bank and the outcome of the Reserve Bank s due diligence exercise.