RBI proposes draft guidelines for Small Finance Banks licence

Two months after proposed announcement to issue Draft Guidelines for ‘on tap’ Licensing of Small Finance Banks (SFB), the Reserve Bank of India (RBI)
has finally issued guidelines on the same for stakeholders consideration.

According to the draft guidelines, Individuals or professionals, (with at least 10 years of experience in banking and finance at a senior level); Companies and Societies in the private sector, (with 5 years experience of running their businesses), existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) can apply for SBF licenses.

The draft guidelines also allow payments banks (PBs) to apply for SFBs licences. The promoter of a payments bank is eligible to set up an SFB, provided both banks come under the non-operating financial holding company (NOFHC) structure, said the RBI proposed guidelines.

Suggestions and comments on the draft guidelines to RBI can be shared before Oct 12, 2019.

Currently, PBs are not allowed to lend and deposits are capped at Rs 1 lakh per customer. A small finance bank licence will enable PBs to break out its limitation on lending and deposits.

The main objective of SFBs would be to accelerate financial inclusion process through supplying credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, with the help of high technology-low cost operations.

For SFBs applicant, to obtain license, would require to present their viable business plan to address how the bank proposes to achieve the objectives behind setting up of SFBs.

The RBI revised the minimum paid-up equity capital requirements for SFBs to Rs 200 crore except for SFBs converted from UCBs. It further proposed a minimum of 40% of the paid-up voting equity capital for promoters for five years.

The promoters’ stake should be brought down to a maximum of 30 per cent of the paid-up voting equity capital of the bank within a period of 10 years, and to a maximum of 15% within 15 years from the date of commencement of business of the bank, the draft added.

Meanwhile, the draft does not give permission of joint venture by different promoter groups to set up SFBs. The small finance banks will also be not allowed to set up any subsidiaries.

The small finance banks will be given scheduled bank status once they commence their operations.