The Reserve Bank of India (RBI) has recently made headlines for releasing their final guidelines concerning ‘on tap’ licensing for Small Finance Banks (SFBs). Back in 2015, the RBI issued in-principle approval to ten applicants set to become SFBs. As part of this process, they stated that after gaining significant experience with these banks, they would eventually grant ‘on-tap’ licensing. Essentially, an “on-tap” facility means that the RBI will accept applications and issue licenses for banks all year round.
Guidelines for ‘on-tap’ Licensing
The ‘on-tap’ licensing model comes with a set of requirements. For instance, the minimum paid-up voting equity capital or net worth must be ₹200 crores. However, for Primary (Urban) Co-operative Banks (UCBs) looking to transition voluntarily into SFBs, an initial net worth of ₹100 crores is required. This amount needs to be raised to ₹200 crores within five years from the date of commencing business operations.
Scheduled bank status and conversion to SFBs
One significant advantage for SFBs is that they will be granted scheduled bank status immediately upon starting operations. Moreover, they will have general permission to open banking outlets from day one. Payments Banks can apply for conversion into SFBs after operating for five years, provided they meet the eligibility criteria set out in the guidelines.
Key Features of a Small Finance Bank
Primarily, a small finance bank will engage in basic banking activities such as accepting deposits and lending to unserved and underserved sections, including small business units, small and marginal farmers, micro and small industries, and entities from the unorganised sector. With the RBI’s prior approval, they can also conduct non-risk sharing simple financial services activities like distribution of mutual fund units, insurance products, pension products, etc.
Eligibility Criteria for SFB
A variety of candidates are eligible to set up an SFB. This includes resident individuals or professionals with ten years’ experience in banking and finance, companies and societies owned and run by residents, and current Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), Local Area Banks (LABs) and payment banks that are owned and operated by residents.
Quick Facts about SFBs
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| Fact | Detail |
|---|---|
| Net worth requirement | ₹200 crores |
| Scheduled bank status | Immediately upon commencement of operations |
| Number of banking outlets in unbanked rural centres | At least 25% |
| Adjusted net bank credit to Priority Sector Lending (PSL) | 75% |
| Loan portfolio | At least 50% should be loans and advances of up to ₹25 lakhs |
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Regulation and Control Mechanisms for SFBs
While providing an important service, SFBs also need to adhere to certain regulations and control measures. A minimum of 25% of their banking outlets must be in unbanked rural centres. Furthermore, they must extend 75% of their adjusted net bank credit to the Priority Sector Lending (PSL). At least 50% of their loan portfolio should consist of loans and advances of up to ₹25 lakhs. In addition, they are restricted from extending large loans and are subject to Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).