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Small Finance Bank License

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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 Bank

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%.

How to apply for Small Finance Bank License.

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

  • Following the Rule 11 of the Banking Regulation (Companies) Rules, 1949, applications had to be submitted in the directed form. Form III to the Chief General Manager Department of Banking Regulation Reserve Bank of India.

  • Additionally, the applicants must offer the business plan & other important information as directed.

  • Additionally, the applicants must offer the business plan & other important information as directed.

  • Applications were to be held till the close of business as of January 16, 2015.

  • After the experience with Small Finance Bank, applications will be received constantly.

  • Though, these guidelines are subjected to periodic review and revision by the RBI

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.

RBI has explained that SFBs can transform themselves into universal banks by the transition would not be automatic and it will need the regulator’s permission.

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

Frequently Asked Questions

What is a small finance bank?
What is a small finance bank license?
Is a small finance bank separate from a regular commercial bank?
Is that possible that a small finance bank provides a credit card to a customer?
If the Small Finance Bank has successfully obtained permission from RBI can it get ceased or canceled?
What is the capital needed to get a small finance banking license?
How does a small finance bank earn money?
What are the main difficulties faced by a Small finance Bank?
What is the minimum capital adequacy condition for a Small Finance Bank License?
What is the system for application for Small Finance Bank?
Can a promoter of the Big Business/Industrial House Act as a promoter from Small Banks?
Is there any Cap on interest for deposits and advances?
Is there any particular number of Branches that are Eligible to get a License For Small Finance Banks?