The Reserve Bank of India (RBI), the central institution responsible for monetary policy in the country, has recently made headlines. The RBI issued a statement announcing that it had rejected three applications to establish Small Finance Banks (SFBs). These applications did not meet the criteria needed for in-principle approval. It should be noted that the RBI received nearly twelve applications in total under the guidelines for ‘on-tap’ Licensing of Universal Banks and SFBs.
Understanding Small Finance Banks
In India, Small Finance Banks (SFBs) form an important category of banks. These financial institutions cater largely to the underserved sections of the society, such as small businesses, farmers, micro and small industries, and the unorganized sector. Providing basic banking facilities and credit is their primary mandate. A few examples of existing SFBs are Capital Small Finance Bank, Ujjivan, and Utkarsh.
Like commercial banks, SFBs too have to comply with the prudential norms and regulations laid down by the RBI. This includes maintaining of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). In case an SFB wishes to upgrade into a universal bank, it must prove its satisfactory performance for at least five years.
Concept of On-Tap Licensing
“On-tap” Licencing is essentially a term that suggests the RBI’s window for obtaining bank licences is open throughout the year. This means that the RBI is prepared to accept applications and issue licences anytime.
The Monetary Tools: CRR and SLR
Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are vital tools of monetary policy used by central banks. CRR mandates commercial banks to hold a certain minimum amount of deposit as reserves with the central bank. On the other hand, SLR is the minimum portion of deposits that a commercial bank must keep in the form of cash, gold, or other approved securities.
Eligibility Criteria to Establish SFBs
A range of entities can apply to set up an SFB. Resident individuals or professionals with at least 10 years of experience in banking and finance at a senior level are eligible. Companies and societies controlled by residents can also apply. Other entities such as microfinance institutions, non-banking financial companies (NBFCs), local area banks, payment banks, and Urban Cooperative Banks (UCBs) can convert into Small Finance Banks as well, provided they comply with guidelines.
Capital Requirements and Priority Sector Lending
To establish an SFB, the minimum paid-up voting equity capital requirement is Rs.200 crore. Notably, the SFBs have to allocate 75% of their total net credit to priority sector lending. Additionally, half of their loan portfolio has to constitute advances up to Rs 25 lakh.
Branch Network and Regulation
SFBs are expected to set up their branches primarily in unbanked and underbanked areas mainly focusing on rural and semi-urban regions. At least 25% of their branches should be in unbanked rural areas. They need to register as public limited companies under the Companies Act 2013 and obtain a license under section 22 of Banking Regulation,1949. The main regulations governing them include the Banking Regulation Act,1949, and RBI Act,1934.
Previous Year Questions in UPSC Civil Services Exam
In the 2017 UPSC Civil Services Examination, one of the questions asked was about the purpose of setting up Small Finance Banks in India. The options given were supplying credit to small business units, supplying credit to small and marginal farmers, and encouraging young entrepreneurs to set up business, particularly in rural areas. The correct answer was the first and second options.