BTL - 727 - Small Finance Banks

 

The Banking Tutor’s Lessons

BTL 727                                                                          24-11-2024

Small Finance Banks

Small Finance Bank (SFB) is a coming-of-an-age concept introduced to make the Indian banking system stronger and less dependent. It was introduced in 2015 to cater to a certain domain of customers.

 

The main objective of the small finance bank is to strengthen the financial inclusion by extending basic banking services like deposits and the supply of credit across the country.

 

The SFBs are a certain kind of financial institution that provides financial services to the unserved and unbanked areas in India.

 

These banks are registered under the Companies Act 2013 as a public limited company.

 

Small Finance Bank is a specialized segment of banking created by the Reserve Bank of India (RBI) with an aim to strengthen the Indian economy. Such banks intend to execute the concept of financial  inclusion by mainly undertaking the basic banking activities to under-served and underprivileged sections of the country.

 

Subsequently, the SFBs cater to the sections like small business units, micro and small enterprises, small and marginal farmers, and the unorganized sector.

 

These banks also undertake the basic banking activities such as lending and accepting deposits just like other commercial banks.

The RBI issued the guidelines of the Small Finance Bank in November 2014, just after the announcement of the Union Budget for 2014-15.

 

Objectives

 

Small Finance Banks are set up to provide basic banking services to underprivileged and underserved sections of the population in India. These banks are allowed to lend money and accept deposits to the deserving masses. Following are the objectives of the SFBs in India:

 

To strengthen the financial inclusion and promote small business units, small and marginal farmers, micro and small enterprises, and unorganized sectors through high technology low-cost operations.

 

To give specific data of around 90% of small businesses that have no links with the formal financial institutions.

 

To identify and expand access to financial services of sections that are neglected by the other private and public sector banks.

 

Features of Small Finance Banks

 

Resident individuals having minimum 10 years of experience or more in banking and finance, companies and Societies will be eligible to act as promoters to set up small finance banks.

 

NBFCs (Non-Banking Financial Companies), MFIs (microfinance institutions), and LABs (Local Area Banks) can convert their operations into those of small finance banks.

 

Small finance banks require a prior approval for initial 3 years for branch expansion. They must have a ‘local feel’ and culture.

They must chiefly undertake basic banking services like lending advances and accepting deposits to the needy and deserving category. It is not permitted for the SFBs to establish subsidiaries to undertake non-banking financial functions.

 

A robust framework for risk management is needed and the banks are subject to all the prudential norms and RBI rules and guidelines such as maintaining the SLR and CRR.

 

The Small Bank might need to diversify its portfolio of loans. The maximum loan size and investment limit exposure to group borrowers individuals is restricted to 15% of capital funds Loans and advances less than or equal to Rs. 25 lakhs, must constitute a minimum of 50% of the loan portfolio. This must be primarily aimed at the micro-enterprises only.

 

RBI Guidelines for SFBs

 

Now let us have a quick look at the guidelines issued by the prime regulators of banks and financial institutions in India, the RBI, for the small finance banks:

 

Minimum paid-up equity capital must be INR 100 crore.

 

Every such small finance bank must carry the words “Small Finance Bank” in its name.

 

SFBs must obtain prior approval of the RBI to carry out financial operations like the distribution of mutual fund units, pension and insurance products, and so on.

 

These banks must have 25% of its branches set up in unbanked parts of the country.

 

Small Finance Banks must maintain a CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio).

 

SFBs are required to extend 75% of its ANBC (Adjusted Net Bank Credit) to the sectors that are eligible to be classified as priority sector.

 

At least 50% of its loan portfolio should constitute loans and advances of up to Rs. 25 lakh.

 

SFBs may transit to a universal bank, however, they need to fulfil the minimum paid up capital/ net worth requirements as per the universal banks.

 

SFBs cannot act as a BC (Business Correspondent) for other banks, though they can have their own BC network.

 

Scope of Activities

 

SFBs shall primarily undertake the basic banking functions of accepting deposits and lending to the small business units, micro and small industries, marginal farmers, and unorganized sector.

 

SFBs can also undertake other non-risk sharing simple financial services that do not require any commitment of own funds like distribution of mutual funds, pension and insurance products, etc.

 

SFBS can also become an Authorized dealer in foreign exchange business as per their clients’ requirements.

 

SFBs have general permission to open banking outlets from the date of business commencement subject to a conditional requirement of opening at least 25% of its branches in unbanked rural areas.

 

There will not be any restrictions in the small finance banks’ area of operations. However, preference will be given to applicants who set up the bank in a cluster of under-banked areas in the initial phase itself.

 

SFBs’ Foreign Shareholding

 

The Foreign Direct Investment (FDI) policy for the private sector banks would prescribe the foreign shareholding in the SFBs. The current FDI aggregate in a private sector bank from all the sources is allowed up to a maximum of 74% of the paid-up capital of the bank.

 

In the case of FII (Foreign Institutional Investors), FPI (Foreign Portfolio Investors), and individual FII/ FPI holding is restricted to below 10% of the total paid-up capital.

 

The aggregate limit for all the FIIs/ FPIs/ QFI (Qualified Foreign Investors) cannot be more than 24% of the total paid-up capital. It can be raised to 49% of the total paid-up capital by the bank concerned through a resolution by its Board of Directors only after a special resolution is passed by its General Body.

 

Eligible Promoters for Small Finance Banks

 

Resident individuals/ professionals, singly or jointly, each having at least 10 years of experience in the banking and finance sector at a senior level and Companies and Societies in the private sector that are owned and controlled by residents and having a successful track record of running their businesses for at least a period of 5 years are eligible to set up SFBs.

Existing NBFCs, MFIs, and LABs in the private sector, which are controlled by residents and having a successful track record running their businesses for at least a period of 5 years can also opt for conversion into SFBs

 

UCBs (Primary (Urban) Cooperative Banks) that are desirous of voluntary conversion into SFBs can voluntarily transform into a small finance bank.

 

The minimum net worth of such SFBs must be Rs 100 crore from the date of commencement of business. They are required to increase their minimum net worth to Rs 200 crore within 5 years from the date of commencement of business.

 

Provisions Regulating SFBs

 

The SFBs are governed by the provisions of the following Acts:

 

Banking Regulation Act, 1949

Foreign Exchange Management Act, 1999

Reserve Bank of India Act, 1934

Payment & Settlement Systems Act, 2007

Credit Information Companies (Regulation) Act, 2005

Deposit Insurance and Credit Guarantee Corporation Act, 1961

           Other Regulations RBI and other Regulators from time to time.

 

Only when the SFBs commence their operations and are found suitable as per the Section 42 of the Reserve Bank of India Act, 1934, they will be given the status of that of a Scheduled Bank.

 

Sekhar Pariti

+91 9440641014