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Definition
Registration
Procedure
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Rule
Process
FAQ

What is a Small Finance Bank (SFB)License?


It is mandatory for small finance banks must be registered as a public limited company under the Companies Act, 2013. Small Finance bank is considered a kind of niche banks in India. Banks that hold a small finance bank (FFB) license have a right to offer basic banking services of acceptance of securities & lending. The purpose behind these to give financial formation to sections of the economy not being accepted by other banks. Like small company units, small and marginal farmers, micro and small industries and unorganized sector entities.
It will be permitted under Section 22 of the Banking Regulation Act, 1949 and administered by the terms of the Banking Regulation Act, 1949 and Reserve Bank of India Act, 1934 and with other related Statutes and the Directives/Regulations and other Guidelines/Instructions circulated by RBI and other regulators from time to time.

Objectives:

  • Give structure to boost rural and semi-urban savings
  • Offer credit in local areas to carry out economic projects
  • Give saving vehicles to the underprivileged sections of the society
  • By doing hi-tech, low-cost technology, the amount of credit to small businesses

Registration of a Small Finance BankT


For the registration of an SFB certain Acts and Regulations are required to be followed which are:

  • The SFBs or small finance banks must be licensed under the Banking Regulations Act Sec 22(1).
  • These banks too must be supervised by the RBI Act 1934 and Companies Act 2013 as a public company.
  • They must support payments and settlement act 2007
  • Credential information Companies regulation Act 2005 must also comply.
  • Deposit insurance and credit guarantee corporation Act 1961 additionally comes with sufficient pressure on these banks
  • Any act or support that comes from RBI in within.
  • Once operational and working with complete significance these banks must attain scheduled bank status as per Reserve Bank Of India Act 1934 Sec 42(6)(a).
  • These banks too must live by all prudential norms as per the RBI like norms for CRR and SLR i.e. Cash Reserve Ratio and Statuary Liquidity Ratio individually.
  • A least of 50% of the loaning portfolio of the bank has to be of up to Rs.25 lakhs.

Who can apply for a small payment bank license


The eligibility of a promoter desiring to achieve a small payment bank license as prescribed by the RBI are

  • Already existing NBFCs, LABs and MFI owned by residents can apply for a license
  • The promoter shall pass the “Fit and proper” status based on previous credentials by the RBI
  • The promoter shall hold an experience of a minimum of 10 yrs. in the banking sector.
  • In the overall experience, a minimum of past 5yrs should be a period of successful professional functioning of the business.
  • Companies owned by local residents shall be eligible.
  • Paid-up equity capital must have the least value of 100crore.
  • Capital Adequacy ratio should always be maintained as 15% of RWA i.e. risk-weighted assets.
  • 5% of RWA shall be the tier 1 capital and tier 2 capital needs to be limited to a maximum value of 100% of tier1 total capital.
  • The promoter shall be giving a minimum of 40% of the total paid-up equity in the initial phase of 5yrs.
  • One of the net value reaches 500cr listing of the banks will be done mandatorily.
  • FDI policies will be similar to those of private sector banks which means a maximum foreign investment of 74% shall be allowed all sources included.
  • Voting rights to shareholders will be considered complete, as per policies of Banking Regulation Act, to10%.

Procedure supported by RBI to grant Small Finance Bank License:


The RBI also acquires a standard operating procedure to give the Small Finance Bank license. It has the following steps:

  • Screening of application to verify the ability of the applicant
  • If seen eligible an EAC or external advisory committee, which forms of CAs, bankers, finance professionals screen and assess the application.
  • If seen significant the EAC calls the applicant for some clarifications and information.
  • Principal permission is given by RBI is all the steps above are passed by the applicant
  • Within 18 months of getting the approval of the applicant is inadequate to set up an operative bank, the RBI cancels the approval automatically.
  • Once the bank is established and working the RBI lists it in its website along with the details of the applicants for clarity.
  • The RBI serves every step of screening and evaluation very rigidly and licenses are given in tight management. Hence only 10 such banks have been in permanence to date.

Small Finance Bank can enroll in for the change to a regularly scheduled bank after working and abiding by all rules set by the RBI for a least of 5 years. It also requires to reach the least terms of paid-up capitals for the desired status.


Benefits of Small Finance Bank Licenses


Small Finance Banks licenses are more definitive & strict than a regular bank license, such as one provided to State Bank of India (SBI) or ICICI Bank. While small finance banks can offer basic banking activities like deposit-taking and lending. They are not permitted to set up subsidiaries. Also, the loan ticket size is very less in Small Finance Banks related to regular banks. RBI has made compulsory that the activities of promoters of small finance banks must not be mixed with banking operations.

Document Required For Small Financed Bank License



Rules and Regulations


  • Small finance banks will offer basic banking services of acceptance of deposits and lending to needy sections of the society.
  • It will give banking tools to boost saving habits.
  •  It will largely target small business units, marginal farmers and random sector entities in high technology-low cost operations.
  • They are organized as a public limited company in the private sector which is supported either by individuals, corporate, trust or societies.
  • They are administered by the terms of Reserve Bank of India (RBI) act 1934, Banking Regulation Act 1949 and other relevant statutes.
  • Small finance banks are recognized as non-scheduled banks and they are not permitted to borrow funds from the Reserve Bank of India like other scheduled banks.

Minimum capital adequacy requirement for Small finance bank License


Particulars %
Minimum Capital Requirement 15%
Common Equity Tier 1 6%
Additional Tier I 1.5%
Minimum Tier I capital 7.5%
Capital Conservation Buffer Not Applicable
Pre-specified Trigger for conversion of AT1 CET1 at 6% up to March 31, 2019, and 7% thereafter

How to apply for Small Finance Bank License.


Small finance banks must be enrolled as a public limited company under the Companies Act, 2013 and will be authorized under Section 22 of the Banking Regulation Act, 1949. Also, it is administered by the terms of the Banking Regulation Act, 1949 & Reserve Bank of India Act, 1934. Along with another important statute and the Directives/Regulations including other Guidelines/Instructions allotted by RBI and other regulators from time to time.


Reserve Bank of India (RBI) needs to help rural & semi-urban areas like small businesses, unorganized sector, low-income households, farmers and migrant workforce by Small Finance Banks.


Small Finance Banks make money by assembling money from current account & savings account depositors, fixed depositors, commercial papers, Wholesale deposits, refinancing, etc. On saving account they give interest rates within 6 to 7 % directed to conditions. On a fixed deposit around 9%, interest is allowed.


SFBs offer 2 types of products like group loans & individual loans. These products can be moreover divided toward agriculture, education, home improvement, home purchase, livestock loans, etc.


Small Finance Banks need earlier approval for the opening of bank branches from RBI. Universal banks do not need such permission to roll out a branch in the unbanked rural areas.


Small Finance Banks required to enlarge 75% of their Adjusted Net Bank Credit (ANBC) to the organized sectors following priority sector lending (PSL) by the RBI.


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Frequently Asked Questions


It is a niche bank set up to give banking to the needy financial sectors and small capital business groups and the separated population of the rural and semi-urban sector to get joined to the institutional banking sector.

Registration obtained by a promoter to start a working small finance bank with due authority to give easy banking services to customers like deposits, lending, and small financial products is the Small Banking Finance Licence.

It is found based on monetary limits yes, of course, a small finance bank operates within very small limits as opposed to normal banks. But when it comes to lending and banking it also includes the right to lend and deposit like normal banks though as said scales may vary.

Although it has the leverage to give money to its customers through the small finance banks are not permitted to allow any kind of credit cards to its customers. Debit and ATM cards are permitted.

Yes once the approval has been obtained from the RBI the promoter requires to set up a working and fully operational bank within 18 months. Failing to do so ends in the failure or cancelation of the approval.

The minimum paid-up capital requirement directed by the Reserve Bank of India is 100crore rupees and a minimum of 40% of paid-up equity capital must be the first contribution of the promoter.

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