Small Finance Banks

On 27 November 2014, RBI had released the guidelines on Small Finance Banks along with the Payment Banks. The objective of small finance banks is 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.

As one of the largest financial inclusion initiatives so far; RBI has granted small bank licenses to 10 firms on 16 September 2015.

Who is eligible to apply for Small Finance Bank?

The business model of the small finance banks is such that they are aimed to serve the small borrowers. Due to this, RBI has shut the door of big business houses from entering into the business of small finance banks. According to RBI guidelines, the eligible entities / persons to apply for small finance banks include:

• Resident individuals/ professionals with 10 years of experience in banking and finance
• Companies and societies owned and controlled by such individuals.
• Further, existing NBFCs, Micro Finance Institutions, and Local Area Banks owned and controlled by residents can also opt for conversion into small finance banks.
• The RBI has also stipulated the ‘fit and proper’ criteria for such persons and groups. They must have a sound track record of professional experience or of running their businesses for at least 5 years.
• Applicants with a business plan to serve under-banked regions and north-eastern states of the country will be preferred for the license, and they will be permitted to expand nationally after a few years.

Scope of activities

The RBI has not put any restriction on the operations of small finance banks. They are meant to provide basic banking facilities for the poor and small businessmen.

Minimum Paid-up equity capital

Small Finance Banks should have a minimum capital of Rs. 100 crore and maintain a capital adequacy of 15%. Further, Minimum initial contribution of the promoter to the paid-up capital shall be 40% and they can bring down his holding to 26% in 12 years from commencement. RBI makes listing mandatory once the net worth reaches Rs. 500 crore.

Prudential Norms

The Small Finance Banks will be subject to all prudential norms and regulations of RBI as applicable to other commercial banks.

Business Model

The Small Finance Banks model is for local players or niche players. Since objective behind establishment of such banks is to serve unbanked, marginal customers; they have been mandated to extend 75% of their credit to priority sector lending. Further, at least half of these loans should be below Rs. 25 Lakh.