Monday, 13 February 2017

Small Finance Banks notes | Banks in India

Small Finance Banks

With a need of financial inclusion in the country, RBI and central government has taken many steps at different times. Taking a further step, RBI gave differentiated licenses for specific activities to new set of banks named Payment Banks and Small Banks.
With their coming, customers will have a variety of choices.

What is a Small Finance Bank?

Small Banks are physical banks whose aim is to provide basic banking products such as deposits and supply of credit, but in a limited area of operation. Their work is to supply credit to small farmers, micro and small industries, and other unorganised sector entities through high technology-low cost operations.

Important features of Small Banks:

  • They can accept any deposit (savings, current, fixed deposits, recurring deposits) like commercial banks.
  • Unlike payment banks, small finance banks will be allowed to lend money also.
  • For the initial 3 years, prior approval will be required for branch expansion.
  • To give the feel of local bank, their area of operation will be restricted.
  • NBFC’s , any individual with 10 years of experience in banking can apply for licenses.
  • Their target are small businesses and MSMEs.
  • They are not allowed to lend the deposited money to big businesses or industries.

Some of the conditions for setting up Small Bank:

  • Minimum paid-up equity capital requirement of Rs 100 crore.
  • Every small finance bank must have the words “small finance bank” in its name.
  • They cannot set up subsidiaries to undertake non-banking financial service activities.
  • 75% of its Adjusted Net Bank Credit (ANBC) should be advanced to the priority sector as categorized by RBI.
  • Maximum loan size to a single person cannot exceed 10% of total capital funds; cannot exceed 15% in the case of a group.
  • At least 50% of its loans should constitute loans and advances of up to 25 lakh.
  • Small banks can undertake financial services like distribution of mutual fund units, insurance products, pension products, and so on, but not without prior approval from the RBI.
  • A small bank can transform into a full-fledged bank, but only after RBI’s approval.
  • A fundamental requirement is that it must have 25% of its branches set up in unbanked areas.
Most of the entities that have been given nod for setting up small bank are micro-finance institutions.
Ten entities which have been given in-principle approval are Au Financiers (India) Limited, Jaipur, Capital Local Area Bank Limited, Jalandhar, Disha Microfin Private Limited, Ahmedabad, Equitas Holdings P Limited, Chennai, ESAF Microfinance and Investments Private Limited, Chennai, Janalakshmi Financial Services Private Limited, Bengaluru, RGVN (North East) Microfinance Limited, Guwahati, Suryoday Micro Finance Private Limited, Navi Mumbai, Ujjivan Financial Services Private Limited, Bengaluru, and Utkarsh Micro Finance Private Limited, Varanasi.