September 18, 2015
The Reserve Bank of India (RBI) granted approval to 10 applicants to set up small finance banks under the Guidelines for Licensing of Small Finance Banks in the Private Sector (guidelines) issued on November 27, 2014.
Out of the 72 applications received, only 10 applicants were finalized for granting small finance bank licenses. Out of these 10, eight are microfinance institutions. The approval granted is valid only for 18 months to enable the applicants to comply with the requirements under the guidelines and fulfill other conditions given by the RBI. Failure to comply will result in their licenses being cancelled by the RBI.
The RBI has selected these applicants after three different committees contributing to the final decision, backed by a detailed case study for each applicant. SKS Microfinance and Dewan Housing Finance (an NBFC) were two of the applicants who failed to qualify for the license.
What Are Small Finance Banks?
Small finance banks are banks whose operations are restricted to a limited area. These banks can offer loans, as well as deposits, but will mainly cater to the underserved and unserved section of the society.
Objective of providing the license:
According to RBI, the main objective behind providing these licenses is to increase financial inclusion by (a) provision of savings vehicles, and (ii) 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.
Eligibility criteria set for the license:
Any resident individuals/professionals with 10 years of experience in banking and finance; and companies and societies owned and controlled by residents will be eligible to set up small finance banks.
In terms of what a small finance bank can actually do, the following are some key aspects:
Small finance banks can 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.
The minimum paid-up equity capital for small finance banks is set to be Rs. 100 crore. The promoter's minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40% and gradually brought down to 26% within 12 years from the date of commencement of business of the bank.