Understanding Small Banks

The small banking system was set up in 2014 by the Reserve Bank of India (RBI) through a declaration made in the Union Budget of that year. In November, the RBI set up banking facilities and rules for small banks and has since accommodated over ten small banks to function across the country. The primary purpose of small banks is to cater to the section of society that has not enjoyed banking facilities provided by the prominent government and private banks due to factors like high account balance requirements, lower interest on deposit options, lack of personal interactions, and demographic convenience.

The Small Bank’s Power

Guidelines to open a Small Finance Bank 

The Reserve Bank of India has set up 16 rules or specifications to open an SF bank. These are listed below.

•   An SFB must be registered as a public limited company
•   An SFB must offer interest rates and lending facilities to the less privileged sections of society.
•   They should hold the following objectives in the utmost regard
•   People with over ten years of experience in the banking industry can open an SF bank
•   They should be fit and clear to run the business functions as per scrutiny results shared by the RBI
•   These entities can be an individual unit or part of an umbrella organization promoting this small bank; however, the holding company cannot engage or use profits from the small bank or engage in business with the SFB customers
•   Small banks have access to all basic banking facilities; however, they cannot indulge in profit-making terms which contradict the basic objectives of the system
•   SFBs need to have a minimum start-up capital of 200 crores
•   The owners or promoters of the small finance bank cannot hold more than 40% of the equity shares of the bank
•   Foreign banks or companies can tie up with small banks as per the rules of Foreign Direct Investment in India
•   Shareholders of a small bank have up to 26% of voting rights in the firm
•   The SFBs have to follow all the risk management norms and banking guidelines shared with commercial banks
• A Small bank can be used as a Non-Banking Financial Company (NBFC) if it meets all the requirements, legal and judicial; for setting up a company as such
• When applying for an SF bank license, the bank’s business plan, along with projected reports, needs to be shared with RBI.
• All corporate governance regulations need to be complied with as per the RBI
• Small Finance Banks cannot be tied up with other bank categories and banking businesses in any manner or sort
• An Small Finance Banks can be converted into a global banking network with the approval of the RBI
• All applications need to be sent to the RBI, the Department of Banking Regulation of the RBI.

What is the Main Function of Small Banks?

There are various key features of the small banks but the main ones are mentioned below.

The Main Features of Small Finance Banks Are Mentioned Below

• Providing loans for small businesses.
• Providing bank facilities to small and marginal farmers.
• Basic banking activities of offering deposits and credits.
• To give credit and financial facilities to micro and small industries.
• Opening loans, saving accounts, fixed deposits, and RD( recurring deposit) accounts to people willing to save money.

What Are the Various Advantages of Small Banks?

Here are the best advantages of Small banks mentioned below.

•  Like big banks, you can open RD(Recurring Deposits), fixed deposits, savings and current accounts in small finance banks. Here you can get more than 8℅ FB interest dates in RD and FD.
• There are no restrictions on availing of loans for any business. Farmers or entrepreneurs cab take loans from these banks as per their needs.
• The main objective of these banks is to provide them with banking services. The areas which are not able to take advantage of banks services till date luke rural area, agriculture sectors etc.
• There is bo pressure from big private banks. Patrons can expand the bank on a large scale.
• Indian finance companies, non-banking finance companies, and microfinance institutes can also apply for small banks.

Conclusion 

Small banks offer higher interest rates than most other banking institutions and have tremendous lending capacities. Along with the salient features of the banks mentioned above, Small Finance Banks also share the same privileges as commercial banks. They can open savings and current accounts for any customers, preferably for rural and underprivileged classes. They have insurance if the bank ceases to function, and they have listed very low-risk evaluation models run through their business model. Also, due to the local nature of their existence, they have a very personal touch to banking and are easily accessible.