The Reserve Bank of India (RBI) decided to grant in-principle approval to 10 applicants to set up small finance banks under the Guidelines for Licensing Small Finance Banks for the Private Sector, issued on 27th November 2014. Small Finance Banks are differentiated banks serving niche interests and are local area banks to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force. The applicants given in principal approval for setting up Small Finance Banks are:
- Au Financiers (India) Ltd., Jaipur (Motilal Oswal Private Equity Advisors Pvt. Ltd, (IFC as one investor)
- Capital Local Area Bank Ltd., Jalandhar
- Disha Microfin Private Ltd., Ahmedabad
- Equitas Holdings P Limited, Chennai
- ESAF Microfinance and Investments Private Ltd., Chennai
- Janalakshmi Financial Services Private Limited, Bengaluru (TATA Capital,MorganStanley Private Equity as Investors)
- RGVN (North East) Microfinance Limited, Guwahati (SIDBI,OIKO Credit International as a investors)
- Suryoday Micro Finance Private Ltd., Navi Mumbai (IFC,HDFC,HDFC Life as investors)
- Ujjivan Financial Services Private Ltd., Bengaluru
- Utkarsh Micro Finance Private Ltd., Varanasi (IFC as a investor)
Small Finance Banks in the Private Sector
Small finance banks will be assigned financial inclusion by 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.
What will small Finance Banks do?
The small finance banks shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities. There will not be any restriction in the area of operations of small finance banks.
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 up to Rs. 2.5 million
The minimum paid-up equity capital for small finance banks shall be Rs. 1 billion. The promoter’s minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40 per cent and gradually brought down to 26 per cent within 12 years from the date of commencement of business of the bank. The foreign shareholding in the payments bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks, which allows investment up to 100% in an Indian private sector bank.
Small finance bank can become a universal bank, but such transition will 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.