UPSC » Economy Notes » Small Finance Bank (SFB)

Small Finance Bank (SFB)

Check out the details about Small Finance Bank (SFB).

Introduction

  • SFBs are the financial institutions which provide financial services to the unserved and unbanked region of the country. 
  • They  shall be registered as a public limited company under the Companies Act, 2013. 
  • SFBs are licensed and governed by the provisions of the Banking Regulation Act, 1949.
  • They are bound by the guidelines and instructions framed by the  Reserve Bank of India (RBI) from time to time under different statutes. 
  • The statutes are the Reserve Bank of India Act, 1934; Foreign Exchange Management Act, 1999; Payment and Settlement Systems Act, 2007; etc. 
  • SFBs  will be given scheduled bank status once they commence their operations, and found suitable as per Section 42 of the Reserve Bank of India Act, 1934.

Objectives

  • The objectives of setting up of small finance banks will be for furthering financial inclusion by:  
  1. provision of savings vehicles primarily to unserved and underserved sections of the population, and 
  2. supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganized sector entities.

Eligibility and Capital Requirement 

Who can Open SFB?

  • Resident individuals/professionals with 10 years of experience in banking and finance.
  • Companies and Societies owned and controlled by residents will be eligible as promoters. 
  • Existing NBFCs, Micro Finance Institutions (MFIs), and LABs that are owned and controlled by residents.
  • Joint ventures by different promoter groups are not eligible.

Capital Requirements

  • The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore.
  • In view of the inherent risk of SFBs, it shall be required to maintain a minimum capital adequacy ratio (CAR)  of 15% of its risk weighted assets (RWA) on a continuous basis.
  • Tier I capital should be at least 7.5% of RWAs. 
  • Tier II capital should be limited to a maximum of 100 per cent of total Tier I capital. 
  • CAR will be computed under Basel Committee’s standardized approaches.

Scope of Activities

  • SFB can accept deposits and provide credit.
  • It can also undertake other non-risk sharing simple financial services activities, such as distribution of mutual fund units, insurance products, pension products, etc.
  • Can also become a Category II Authorized Dealer in foreign exchange business for its clients’ requirements. 
  • It cannot set up subsidiaries to undertake non-banking financial services activities.
  • There will not be any restriction in the area of operations of small finance banks.
  • Preference will be given to those applicants who in the initial phase set up the bank in a cluster of under-banked States / districts, such as in the North-East, East and Central regions of the country. 

Foreign Shareholding

  • The foreign shareholding in SFBs would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.
  • Currently, the aggregate FDI in a private sector bank from all sources will be allowed upto a maximum of 74% of the paid-up capital of the bank.
  • In the case of Foreign Institutional Investors (FIIs) / Foreign Portfolio Investors (FPIs), individual FII / FPI holding is restricted to below 10% of the total paid-up capital.
  • Aggregate limit for all FIIs /FPIs / Qualified Foreign Investors (QFIs) cannot exceed 24% of the total paid-up capital.
  • This can be raised to 49% of the total paid-up capital by the bank concerned through a resolution by its Board of Directors followed by a special resolution to that effect by its General Body. 

Other Key Points

 

  • They need to maintain a Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
  • They are required to extend 75% of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.
  • At least 50% of its loan portfolio should constitute loans and advances of up to Rs. 25 lakh.
  • SFBs can also transit to a universal bank, subject to fulfilling minimum paid-up capital / net worth requirements as applicable to universal banks.
  • They cannot be a Business Correspondent (BC) for another bank. However, it can have its own BC network.