Small finance bank setup in India

The Small Finance Bank setup in India is similar to a normal banking activities of other commercial banks viz. accepting deposits from the customers for the purpose of lending to unserved and underserved segments across the country. These banks can also sell mutual funds, pensions, insurance and foreign exchange to their customers

The permission to set up of small finance banks in India is a part of the efforts of RBI for promoting ‘Financial Inclusion’ objectives of the government.  In small finance bank, the account holder gets the basic banking services with supply of credit to small business units, small and marginal farmers, micro and small industries; and other unorganized sector entities, through high technology-low cost operation.  The operation of Small Finance Banks  is not restricted to specific area; they can expand across the country subject to a condition that 25% of their branches should be in unbanked area.

As in commercial banks, the prudential norms like requirements of maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are applicable to ‘Small Finance Bank’. The small finance banks will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for priority sector lending. Small finance banks can also extend large loan, but at least 50% of their loans should be extended to borrowers of a limit of below Rs.25 lakhs.  RBI has stipulated a cap on loans to individuals and groups at 10% and 15% of their net worth.

The approval for promoting a Small Finance Banks is subject to a condition that the promoters should be the resident individuals/professionals with 10 years of experience in banking and finance. Companies and societies owned and controlled by resident Indians are also eligible to set up small financial banks. Besides, existing Non-Banking Financial Companies (NBFCs), Micro Finance Institutions (MFIs) and Local Area Banks (LABs) which are owned by resident Indians can be converted into small finance banks. However, promoters or promoter groups should be ‘fit and proper’ with a sound track record of professional experience or of running their business for at least a period of five years in order to be eligible to promote small finance bank. The minimum paid –up capital requirement for small finance bank shall be Rs.100 Crore. The initial contribution to the paid-up equity capital of such small finance bank shall 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. Foreign shareholding in the bank would be as per Foreign Direct Investments (FDI) regulations.

The small finance bank can be later on converted in to full pledge universal bank. The approval for full pledge bank is subject to satisfactory track record of performance and Reserve Bank’s due diligence exercise. Fulfillment of minimum paid-up capital/net worth is requirement for universal bank (presently Rs.500 crore paid up capital is required for full service universal bank).

Update: RBI on September 16, 2015 granted in-principle approval to 10 entities to set up small finance banks. The in princile approval is valid for 18 months.The entities who got the permission are Ujjivan Financial Service (Bengaluru),Janalakshmi Financial Service ( Bengaluru) Au Financiers (Jaipur), Equitas Holdings (Chennai),Capital Local Area Bank (Punjab), Disha Microfin (Ahmedabad), ESAF Microfinance (Chennai), RGVN (North East) Micro Finance (Guwahati), Suryodaya Micro Finance(Navi Mumbai), Utkarsh Micro Finance (Varanashi). There were 72 applicants, however, RBI granted licence to only 10 who have been already in the business of extending credit facility to small borrowers who have had no access to formal crdits from banks.

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