Small Finance Bank license: Objectives, Rules, Key Challenges

Introduction

Small finance banks are a
type of bank that helps those sections which do not get support from other
banks. Small finance banks provide basic bank facilities to the economical
sections which are not supported by the other banks. It helps to provide
financial aid to the small business units, small
or marginal farmers, micro or small industries. It includes small scale
businesses, the unorganized sector, low-income households, farmers, etc.

Small finance banks are registered
as a public limited company under companies act in 2013. It is licensed under
section 22 of the banking regulation act 1949. It is governed by the provisions
of the banking regulation act 1949 and the reserve bank of India act
1934. Reserve bank of India wants to help the weaker sections of the
economy ie rural and semi-urban areas.

Small finance banks let their
depositors invest in current accounts and savings accounts, fixed deposits,
commercial papers, refinancing, etc. On saving accounts they offer a 6-7%
interest rate. on fixed accounts, they offer a 9% interest rate and so on.

Small finance banks provide two
types of loans that are individual and group loans. The group loans are offered
on joint liability. If a member of the group fails to pay the amount then the
whole group is liable for the loan.

Small finance groups require prior approval every time from the RBI when they want to establish a new branch. Small Finance Banks also require to extend 75% of their Adjusted Net Bank Credit (ANBC) to the classified sectors under the priority sector lending (PSL) by the RBI.

The objective of small finance banks

  • Its main and foremost purpose is to provide an
    institutional mechanism for promoting savings among the rural &
    semi-urban sections of society.
  • It helps in the supply of credit to small business
    units; small & marginal farmers; micro & small industries and other
    unorganized sectors.

Rules for Small Finance banks

  • Small finance banks will perform basic banking services
    of accepting the deposits and lending money to backward sections.
  • It will provide banking facilities to boost saving
    habits among rural people.
  • These small finance banks are established as a public
    limited company. They may be promoted either by individuals, corporate,
    trust or societies.
  • These are governed by the provisions of
    the Reserve Bank of India act 1934 and the Banking Regulation Act
    1949.
  • Small Finance Banks cannot borrow funds from the
    Reserve Bank of India, unlike any other scheduled bank.

Key challenges faced by Small Finance Bank

  • It is difficult to maintain an ideal technology
    platform which will be beneficial for both the customers in ease of
    transactions and to the bank as a reduction in cost.
  • Earlier Small Finance Banks were functioning as MFIs (Microfinance institutions),
    Small financial Banks did not handle deposits before.
  • It is essential for them to invest in the
    infrastructure which enables deposits through ATM network and partnering
    with banks.
  • Capital adequacy ratio, cash reserve ratio (CRR) and
    statutory liquidity ratio (SLR) will be an aspect for managing. 
    Which will result in reduced earnings until SFBs develop a substantial
    depositor base for managing them.

Eligibility Criteria for Banks

  • Min. Paid Up Capital Rs. 100 Crores
  • Promoters minimum initial contribution to above 40%(to
    be bought to 26% within 12 years of commencement)
  • Foreign Shareholding as per FDI policy for private
    banks
  • Subjected to all prudential norms and regulations of
    commercial banks
  • Extend 75% of ANBC to the sectors classified as PSL
  • At least 50% of its loan portfolio should constitute of
    loan and advances up to 25 lakhs

FAQs

Q1-Why Small Finance Banks are
needed?

Small finance banks can
play an important role in the supply of credit to micro
and small enterprises, agriculture and banking services in
unbanked and under-banked regions in the country. Therefore RBI decided to
license new “small finance banks” in the private sector.

Q2-Are payments banks scheduled
banks?

Payments banks is a new model
of banks conceptualized by the Reserve Bank of India (RBI).
These banks can accept a restricted deposit, which is currently
limited to ₹100,000 per customer and may be increased further. These banks cannot
issue loans and credit cards

Q3-What is the difference between
small finance banks and commercial banks?

These banks can do almost
everything that a normal commercial bank can do but at a much smaller
scale. One such difference is that a payment bank has a
limit of 1 lakh on deposit per account; small finance banks do not
have a limit. Payments banks cannot lend, while small finance
banks can give loans.

Q4-How many private banks are there
in India?

In all, there are 21
private sector banks in India. Out of which there are 13 old
private sector banks that were present even before nationalization 1969 and are
still autonomous and private which are, Catholic Syrian Bank, City Union Bank,
etc.

Q5-Is Jana bank small finance bank
listed?

Jana Small Finance Bank, formerly Janalakshmi Financial Services, is looking at listing its shares by March 2021. It started operations on March 28. As a microfinance institution, Bengaluru-based Janalakshmi raised Rs 16 billion as capital in 2017-18.

Conclusion

Thus we can say that small finance
banks help those sections which do not get support from other
banks. Small finance banks provide basic bank facilities to the economical
sections which are not supported by the other banks. They are important for the
development of the weaker sections as they provide the much needed financial
help to them.

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By |2019-09-11T05:14:29+00:00June 29th, 2019|Categories: NBFC|Tags: , , , , |Comments Off on Small Finance Bank license: Objectives, Rules, Key Challenges

About the Author:

Himanshu Jain is the founder of LegalRaasta – India's top portal for registration, trademark, return filing and loans. Himanshu is a CFA (US) & MBA (ISB). He has over 8+ years of corporate / consulting experience with top firms like McKinsey