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Guide to Small Banks in India | Company Vakil

Small finance banks are a kind of niche banks in India. Banks with a small finance bank license could give fundamental banking service of acceptance of deposits and lending. The intention behind these banks are to provide financial inclusion to sections of the economy not being served by other banks, such as the small business units, small and marginal farmers, micro as well as small industries and the unorganized sector.

Registration, licensing and regulations

The small finance bank are registered as a public limited company under the Companies Act, 2013. They are licensed under Section 22 of the Banking Regulation Act, 1949 and managed by the provisions of the Banking Regulation Act, 1949; Reserve Bank of India Act, 1934; Foreign Exchange Management Act, 1999; Payment and Settlement Systems Act, 2007; Credit Information Companies (Regulation) Act, 2005; Deposit Insurance and Credit Guarantee Corporation Act, 1961; other significant Statutes and the Directives, Prudential Regulations and other Guidelines or Instructions issued by the RBI and other regulators from time to time.

The small finance banks are given scheduled bank status once they start their operations, and found appropriate as per Section 42 (6) (a) of the Reserve Bank of India Act, 1934.

Objectives

The main objectives of setting up of small finance banks will be for furthering financial enclosure by

(i) provision of savings vehicles chiefly to un- served  sections of the society.

(ii) provide credit to small business units; small and marginal farmers; micro and small industries; and also other unorganized sector entities, by high technology-low cost operations.

Eligible promoters

Resident individuals or professionals with at least 10 years of experience in banking and finance; and Companies and Societies owned and controlled by the residents are eligible as promoters to set up a small finance banks. The Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) which are owned and controlled by the residents could also opt for conversion into small finance banks after complying with all the legal and regulatory requirements of several authorities and if they conform to these guidelines. On the other hand, joint ventures by different promoter groups for the reason of setting up small finance banks wouldn’t be allowed. As local focus and the ability to provide smaller customers will be the key criterion in licensing such banks, this may be a more suitable vehicle for local players or players who are determined on lending to un-served sections of the society. Therefore, proposals from large public sector entities ,industrial and business houses, including NBFCs promoted by them, are not entertained.

Promoter / Promoter Groups as defined in the SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2009 should be ‘fit and proper’ in order to be eligible to promote small finance banks. RBI will assess the ‘fit and proper’ status of the applicants on the basis of their past record of sound credentials and integrity; financial soundness and successful track record of the professional experience or the running their businesses, etc. for at least five years.

Scope of activities

The small finance bank, in continuance of the objectives for which it is set up, shall primarily undertake basic banking activities of acceptance of deposits and lending to un-served section including small business units, small and marginal farmers, micro as well as small industries and unorganized sector entities. It could also undertake other non-risk sharing simple financial services activities which do not require any commitment of own fund like distribution of mutual fund units, insurance products, pension products, etc. with the former approval of the RBI and after complying with the needs of the sectoral regulator for such products. The small finance bank could also turn into a Category II Authorized Dealer in foreign exchange business for its clients’ requirements. It couldn’t set up subsidiaries in order to undertake non-banking financial services activities.

The yearly branch expansion plans of the small finance banks for the first five years would need prior approval of RBI. The yearly branch expansion plans should be in conformity with the requirement of opening at least 25 per cent of its branches in unbanked rural centers

Capital requirement

The least paid-up equity capital for small finance banks shall be Rs.100 crore .In view of the natural risk of a small finance bank, it shall be required to maintain a minimum capital sufficiency ratio of 15 per cent of its risk weighted assets (RWA) on a continuous basis, subject to any higher percentage as may be approved by RBI from time to time. Tier I capital must be at least 7.5 per cent of RWAs. Tier II capital must be limited to an utmost of 100 per cent of total Tier I capital. As small finance banks are not expected to contract with sophisticated products, the capital sufficiency ratio will be computed under Basel Committee’s standardized approaches.

Promoter’s contribution

The promoter’s minimum primary contribution to the paid-up equity capital of such small finance bank will at least be 40 per cent. If the   initial shareholding by promoter in the bank is in excess of 40 per cent, it should be brought down to 40 per cent within five years. The promoter’s minimum input of 40 per cent of paid-up equity capital shall be locked in for five years from the date of beginning of business of the bank. Further, the promoter’s stake must be brought down to 30 per cent of paid-up equity capital of the bank within 10 years, and to 26 per cent within 12 years from the date of origination of business of the bank. For further details visit our website

 

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