Small Finance Bank (SFB)

Small Finance Bank- Relevance for UPSC Exam

• GS Paper 3: Indian Economy- Issues relating to planning, mobilization of resources, growth, development and employment.

Small Finance Bank- Context

• Recently, the Reserve Bank of India (RBI) said it has received applications from two more entities seeking licences to operate small finance banks (SFBs).
• This is as per RBI’s guidelines for ‘on tap’ licensing of small finance banks in the private sector.
• ‘On tap’ licensing: It means that the RBI will accept applications and grant licences for banks throughout the year.

Small Finance Bank- Key Points

• About SFBs: SFBs have been introduced in India on the recommendation of an internal group of the RBI.
  • It recommended like microfinance institutions (MFIs), banks should begin viewing the poor as profitable customers.
  • The idea became reality during the governorship of Raghuram Rajan.
  • SFBs are registered as a public limited company under the Companies Act, 2013.
• Mandate of Small Finance Banks: SFBs are established to primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections like-
  • Small business units,
  • Small and marginal farmers,
  • Micro and small industries and
  • Unorganized sector entities.

Small Finance Bank- Eligibility Criteria for Application

• Eligibility for Promoters:
  • Resident individuals/professionals with 10 years of experience in banking and finance;
  • Companies and societies owned and controlled by residents will be eligible to set up small finance banks.
  • Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents can also opt for conversion into small finance banks.
• Capital Requirement: The minimum paid-up equity capital for small finance banks shall be Rs. 100 crores.
  • Promoter must contribute a minimum of 40% equity capital and should be brought down to 30% in 10 years.

Small Finance Bank- Key Features

• Priority sector lending requirement: 75% of total adjusted net bank credit.
• Foreign shareholding: It is capped at 74% of paid capital and Foreign Portfolio Investors (FPIs) cannot hold more than 24%.
• Loan Disbursement: 50% of loans must be up to Rs 25 lakh.
  • Maximum loan size: maximum 10% of capital funds to a single borrower and maximum 15% to a group.
• Capital adequacy ratio (CAR): It should be 15% of risk-weighted assets and Tier-I should be 7.5% of risk-weighted assets.
• Other Allowed Activities: Along with taking small deposits and disburse loans, SFBs are allowed to distribute mutual funds, insurance products, and other simple third-party financial products.

Small Finance Bank- Prohibited Activities

• SFBs are prohibited from-
  • Lending to big corporates and groups.
  • Opening branches without prior RBI approval for the first five years.
  • Setting up subsidiaries to undertake non-banking financial services activities.
  • Acting as a business correspondent of any bank.

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