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.