Small Finance Bank (SFB)

Small Finance Bank (SFB)

The Reserve Bank of India has decided to allow urban co-operative banks (UCB) to convert into small finance banks (SFB), a move aimed at bringing these entities into mainstream banking.

Significance of this move:

• UCBs currently face regulation by both the RBI and the respective State governments. By turning into SFBs, they will be regulated only by the RBI.

What are small finance banks?

• The small finance bank will primarily undertake basic banking activities of acceptance of deposits and lending to unserved and undeserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities.
• RBI guidelines, the eligible entities/persons to apply for small finance banks:
• Professionals with 10 years' experience in banking; existing NBFCs, Micro Finance Institutions, and Local Area Banks owned and controlled by residents can also opt for conversion into small finance bank; Promoter group must have 5 years track record.

What they can do?

• Take small deposits and disburse loans.
• Distribute mutual funds, insurance products and other simple third-party financial products. Lend 75% of their total adjusted net bank credit to priority sector.
• Maximum loan size would be 10% of capital funds to single borrower, 15% to a group. Minimum 50% of loans should be up to 25 lakhs.

What they can't do?

• Lend to big corporates and groups.
• Cannot open branches with prior RBI approval for first five years.
• Other financial activities of the promoter must not mingle with the bank.
• It cannot set up subsidiaries to undertake no-banking financial services activities. Cannot be a business correspondent of any bank.

The guidelines they need to follow:

• Promoter must contribute minimum 40% equity capital and should be down to 30% in 10 years.
• Minimum paid-up capital would be Rs.100 cr.
• Capital adequacy ratio should be 15% of risk weighted assets, Tier-I should be 7.5%. Foreign shareholding capped at 74% of paid capital, FPIs cannot hold more than 24%. Priority sector lending requirement of 75% of total adjusted net bank credit.
• 50% of loans must be up to Rs 25 lakh.