Societies and companies controlled and owned by residents, professionals or residents having 10 years of experience in finance and banking would be eligible for setting up small finance bank.You can read about the Granting License for Small Finance Banks by the Reserve Bank of India (RBI)
After conforming to the guidelines and requirements of various regulatory and legal requirements of different authorities, the existing microfinance institutions and non-banking finance companies which are controlled and owned by residents will have the permit to be the promoters and set up small finance banks.
What is a Small Finance Bank (SFB)License?
It is mandatory for small finance banks must be registered as a public limited company under the Companies Act, 2013. Small Finance bank is considered a kind of niche banks in India. Banks that hold a small finance bank (FFB) license have a right to offer basic banking services of acceptance of securities & lending. The purpose behind these to give financial formation to sections of the economy not being accepted by other banks. Like small company units, small and marginal farmers, micro and small industries and unorganized sector entities.
It will be permitted under Section 22 of the Banking Regulation Act, 1949 and administered by the terms of the Banking Regulation Act, 1949 and Reserve Bank of India Act, 1934 and with other related Statutes and the Directives/Regulations and other Guidelines/Instructions circulated by RBI and other regulators from time to time.
Objectives
- Give structure to boost rural and semi-urban savings
- Offer credit in local areas to carry out economic projects
- Give saving vehicles to the underprivileged sections of the society
- By doing hi-tech, low-cost technology, the amount of credit to small businesses
Registration of a Small Finance Bank
- The SFBs or small finance banks must be licensed under the Banking Regulations Act Sec 22(1).
- These banks too must be supervised by the RBI Act 1934 and Companies Act 2013 as a public company.
- They must support payments and settlement act 2007
- Credential information Companies regulation Act 2005 must also comply.
- Deposit insurance and credit guarantee corporation Act 1961 additionally comes with sufficient pressure on these banks
- Any act or support that comes from RBI in within.
- Once operational and working with complete significance these banks must attain scheduled bank status as per Reserve Bank Of India Act 1934 Sec 42(6)(a).
- These banks too must live by all prudential norms as per the RBI like norms for CRR and SLR i.e. Cash Reserve Ratio and Statuary Liquidity Ratio individually.
Who can apply for a small payment bank license
- FDI policies will be similar to those of private sector banks which means a maximum foreign investment of 74% shall be allowed all sources included.
- Already existing NBFCs, LABs and MFI owned by residents can apply for a license
- Voting rights to shareholders will be considered complete, as per policies of Banking Regulation Act, to10%
- The promoter shall pass the “Fit and proper” status based on previous credentials by the RBI
- One of the net value reaches 500cr listing of the banks will be done mandatorily.
- Companies owned by local residents shall be eligible.
- In the overall experience, a minimum of past 5yrs should be a period of successful professional functioning of the business.
- 5% of RWA shall be the tier 1 capital and tier 2 capital needs to be limited to a maximum value of 100% of tier1 total capital.
- The promoter shall be giving a minimum of 40% of the total paid-up equity in the initial phase of 5yrs.
- Capital Adequacy ratio should always be maintained as 15% of RWA i.e. risk-weighted assets.
Benefits of Small Finance Bank Licenses
Small Finance Banks licenses are more definitive & strict than a regular bank license, such as one provided to State Bank of India (SBI) or ICICI Bank. While small finance banks can offer basic banking activities like deposit-taking and lending. They are not permitted to set up subsidiaries. Also, the loan ticket size is very less in Small Finance Banks related to regular banks. RBI has made compulsory that the activities of promoters of small finance banks must not be mixed with banking operations.
Procedure supported by RBI to grant Small Finance Bank License
- Screening of application to verify the ability of the applicant
- The RBI serves every step of screening and evaluation very rigidly and licenses are given in tight management. Hence only 10 such banks have been in permanence to date.
- If seen eligible an EAC or external advisory committee, which forms of CAs, bankers, finance professionals screen and assess the application.
- If seen significant the EAC calls the applicant for some clarifications and information.
- Within 18 months of getting the approval of the applicant is inadequate to set up an operative bank, the RBI cancels the approval automatically.
- Principal permission is given by RBI is all the steps above are passed by the applicant
Minimum capital adequacy requirement for Small finance bank License
| Particulars | % |
|---|---|
| Minimum Capital Requirement | 15% |
| Common Equity Tier 1 | 6% |
| Additional Tier I | 1.5% |
| Minimum Tier I capital | 7.5% |
| Capital Conservation Buffer | Not Applicable |
| Pre-specified Trigger for conversion of AT1 | CET1 at 6% up to March 31, 2019, and 7% thereafter |
Document Required For Small Financed Bank License
- Following the Rule 11 of the Banking Regulation (Companies) Rules, 1949, applications had to be submitted in the directed form. Form III to the Chief General Manager Department of Banking Regulation Reserve Bank of India.
- Additionally, the applicants must offer the business plan & other important information as directed.
- Applications were to be held till the close of business as of January 16, 2015.
- After the experience with Small Finance Bank, applications will be received constantly.
- Though, these guidelines are subjected to periodic review and revision by the RBI
How to apply for Small Finance Bank License
- Small finance banks must be enrolled as a public limited company under the Companies Act, 2013 and will be authorized under Section 22 of the Banking Regulation Act, 1949. Also, it is administered by the terms of the Banking Regulation Act, 1949 & Reserve Bank of India Act, 1934. Along with another important statute and the Directives/Regulations including other Guidelines/Instructions allotted by RBI and other regulators from time to time.
- Reserve Bank of India (RBI) needs to help rural & semi-urban areas like small businesses, unorganized sector, low-income households, farmers and migrant workforce by Small Finance Banks.
- SFBs offer 2 types of products like group loans & individual loans. These products can be moreover divided toward agriculture, education, home improvement, home purchase, livestock loans, etc.
- Small Finance Banks make money by assembling money from current account & savings account depositors, fixed depositors, commercial papers, Wholesale deposits, refinancing, etc. On saving account they give interest rates within 6 to 7 % directed to conditions. On a fixed deposit around 9%, interest is allowed.
- Small Finance Banks need earlier approval for the opening of bank branches from RBI. Universal banks do not need such permission to roll out a branch in the unbanked rural areas.
FAQs
What is a small finance bank (SFB)?
small finance bank is a type of niche bank in India that primarily serves the needs of underprivileged sections of society, including small business units, small and marginal farmers, micro and small industries, and other unorganized sector entities.
What are the eligibility criteria for obtaining a small finance bank license?
The RBI has set forth various criteria, including the entity’s structure, capital requirement, governance, track record, and more. Generally, entities should have a minimum paid-up capital of ₹200 crore, and the promoter’s shareholding should be at least 40% of the paid-up voting equity capital of the bank.
Who can apply for a small finance bank license?
Eligible entities for applying for an SFB license include non-banking financial companies (NBFCs), microfinance institutions (MFIs), local area banks (LABs), payment banks, and other organizations fulfilling the Reserve Bank of India’s (RBI) criteria.
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