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:

provision of savings vehicles primarily to unserved and underserved sections of the population, and
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 II capital should be limited to a maximum of 100 per cent of total Tier I capital.

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.