Small finance banks are a type of niche banks in India. Banks with a small finance bank (SFB) license can provide basic banking service of acceptance of deposits and lending. The aim behind these is to provide financial inclusion to sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
Regulations
- Existing non-banking financial companies (NBFC), microfinance institutions (MFI) and local area banks (LAB) can apply to become small finance banks.
- They can be promoted either by individuals, corporate, trusts or societies.
- They are established as public limited companies in the private sector under the Companies Act, 2013.
- They are governed by the provisions of Reserve Bank of India Act, 1934, Banking Regulation Act, 1949 and other relevant statutes.
- The banks will not be restricted to any region.
- They were set up with the twin objectives of providing an institutional mechanism for promoting rural and semi urban savings and for providing credit for viable economic activities in the local areas.
- 75% of its net credits should be in priority sector lending and 50% of the loans in its portfolio must in ₹25 lakh (US$34,000) range.
- The firms must have a capital of at least ₹200 crore (US$13 million).
- The promoters should have 10 years’ experience in banking and finance. The promoters stake in the paid-up equity capital will be at least 40% initially but must be brought down to 26% in 12 years. Joint ventures are not permitted. Foreign share holding will be allowed in these banks as per the rules for FDI in private banks in India.
- At net worth of ₹500 crore (US$67 million), listing will be mandatory within three years. Small finance banks having net worth of below ₹500 crore (US$67 million) could also get their shares listed voluntarily.
Objectives
- Provision of savings vehicles.
- Supply of credit to small business units, small and marginal farmers, micro and small industries and other unorganised sector entities, through high technology-low cost operations.
Prudential norms
- The small finance bank will be subject to all prudential norms and regulations of RBI as applicable to existing commercial banks including requirement of maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). No forbearance would be provided for complying with the statutory provisions.
- The small finance banks will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.
- At least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs. 25 lakh.
Transition path
If the small finance bank aspires to transit into a universal bank, such transition will not be automatic, but would be subject to fulfilling minimum paid-up capital / net worth requirement as applicable to universal banks; its satisfactory track record of performance as a small finance bank and the outcome of the Reserve Bank’s due diligence exercise.
Operational SFBs in India
- Ujjivan Small Finance Bank.
- Janalakshmi Small Finance Bank.
- Equitas Small Finance Bank.
- A U Small Finance Bank.
- Capital Small Finance Bank.
- ESAF Small Finance Bank.
- Utkarsh Small Finance Bank.
- Suryoday Small Finance Bank.
- Fincare Small Finance Bank.