Meaning of Small Finance Banks

What does a Small Finance Bank mean?

Small finance banks are those banks that operate in rural sections or sections of society that are excluded from the urban section. To help farmers, small business owners the small finance banks help Like all other banking organisations these types of banks i.e small finance banks also perform major tasks such as deposits and withdrawals.

Small finance banks are registered under public limited companies under the Companies Act 2013. The main significance of small finance banks is to provide inclusion to underdeveloped areas. These banks provide provisions for saving vehicles to underserved or unserved sections of society.

These banks provide financing to the small business units in rural sections.

Who is Allowed to set up Small Finance Banks?

The functioning of small finance banks depends on if the resident individual has more than 10 years of banking experience. The companies registered, owned and controlled by residents will be eligible for setting up small finance banks. Small finance banks have the potential to make better opportunities unlike major banks because they solely focus on underserved people.

The promoters of small finance banks need to be eligible to be considered a part of small finance banks. RBI is usually the intelligent body behind reviewing the organisations, companies whole apply for being promoters of small finance banks.

Promoters’ initial offering to the small finance banks should be at least 40% and gradually brought down throughout the years. The RBI needs to approve all the plans regarding the expansion of the small finance banks in the initial 5 years stage.

What is the Importance of Small Finance Banks?

Small finance banks have accepted deposits and lending money as their primary task. These banks can undertake activities like acting as distributors of various types of mutual funds and pension funds.

Importance of Small Finance Banks:

The small finance banks being an important part of the banking system have various important features that are mentioned below:

• The small finance banks have no restrictions on where they can operate
• They have open permission to operate in any desired location given they fall under proper proximity
• Small Finance Banks are just like any other commercial bank when it comes to risk management
• The company has to submit CRR and SLR like commercial banks
• The small finance banks should mainly focus on the important sectors like agriculture and small business
• The small business bank needs to have at least half of its loan portfolio as loans and advances to microfinance business

List of Small Finance Banks

There are a total of 11 small finance banks that are recognised under RBI namely:

Minimum Paid-Up Capital for Small Finance Bank

The RBI has assigned the minimum paid-up voting equity capital at ₹ 200 crores after changing it from ₹100 crores. The promoter of a small finance business can’t hold voting equity shares for more than five years. If the promoter has an initial shareholder percentage above 40% then it is to be reduced to 40% within five years.

The small finance banks are to be listed if they achieve a net worth of ₹500 crores. The listing is supposed to happen within 3 years.

Minimum Capital for Small Finance Banks

The urban cooperative banks can function or convert themselves into a working small finance banks if they follow the guidelines mentioned by RBI to be a small finance bank. The net worth of these banks should be ₹100 crores and that is to be increased to ₹200 crore within 5 years. The small finance banks can offer up to only 15% of total capital funds as loans.

Conclusion

In the above article, it is mentioned in brief about the definition of small finance banks along with its significance and other information like who are allowed to be promoters and what amount of paid-up capital a small finance bank needs to have. The small finance banks have a huge role to play in regards to development in rural areas as these types of banks are the only mode of accessing incentives and schemes and other financial help when in need. The foreign shareholding of small finance banks is done under the guidance of Foreign Direct Investment (FDI). The small finance banks need to mention “small finance banks” in their names so they can be differentiated from other banks. They are looked after under the Reserve Bank of India Act, 1934 and the banking regulations Act 1949.