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Small finance banks

Topics Covered: Inclusive growth and issues arising from it.

Small finance banks

What to study?

For Prelims: Small Finance Banks- management, functions and features.

For Mains: Financial inclusion- need, challenges and efforts by the government.

Context: The Reserve Bank of India (RBI) granted ‘in-principle’ approval to Saharanpur-based Shivalik Mercantile Cooperative Bank to convert into a Small Finance Bank (SFB), making it the first such lender to have opted for the transition.

 What next?

The ‘in-principle’ approval implies that the lender now has 18 months to comply with all conditions required to get the final SFB license from the RBI.

On being satisfied that the applicant has complied with the requisite conditions laid down by it as part of “in-principle” approval, the RBI would consider granting it a licence for the commencement of banking business under Section 22 (1) of the Banking Regulation Act, 1949 as an SFB.

What are small finance banks?

The small finance bank will primarily 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.

What they can do?

  1. Take small deposits and disburse loans.
  2. Distribute mutual funds, insurance products and other simple third-party financial products.
  3. Lend 75% of their total adjusted net bank credit to priority sector.
  4. Maximum loan size would be 10% of capital funds to single borrower, 15% to a group.
  5. Minimum 50% of loans should be up to 25 lakhs.

What they cannot do?

  1. Lend to big corporates and groups.
  2. Cannot open branches with prior RBI approval for first five years.
  3. Other financial activities of the promoter must not mingle with the bank.
  4. It cannot set up subsidiaries to undertake non-banking financial services activities.
  5. Cannot be a business correspondent of any bank.

The guidelines they need to follow:

  1. Promoter must contribute minimum 40% equity capital and should be brought down to 30% in 10 years.
  2. Minimum paid-up capital would be Rs 100 cr.
  3. Capital adequacy ratio should be 15% of risk weighted assets, Tier-I should be 7.5%.
  4. Foreign shareholding capped at 74% of paid capital, FPIs cannot hold more than 24%.
  5. Priority sector lending requirement of 75% of total adjusted net bank credit.
  6. 50% of loans must be up to Rs 25 lakh.

Sources: the Hindu.