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Small Finance Bank

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The Small Finance Bank (SFB) is a private financial institution intended to further the objective of financial inclusion by primarily undertaking basic banking activities of acceptance of deposits and lending to un-served and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities, but without any restriction in the area of operations, unlike Regional Rural Banks or Local Area Banks.

Small Finance Banks were created pursuant to the announcement in Union Budget 2014-2015, presented on July 10, 2014. RBI issued the Guidelines on 27 November 2014 for licensing and regulation of SFBs. On 16 September 2015, RBI decided to grant “in-principle” approval to 10 applicants to set up small finance banks under the Guidelines issued on November 27, 2014.

The concept of small finance banks was also one of the recommendations in the 2009 Report - A Hundred Small Steps - of the Committee on Financial Sector Reforms headed by Dr. Raghu Ram Rajan.

Resident individuals/professionals with 10 years of experience in banking and finance and companies and societies owned and controlled by residents will be eligible to set up small finance banks. Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents can also opt for conversion into small finance banks.

The minimum capital for SFBs is prescribed at Rs. 100 crore with an initial contribution of 40% coming from the promoters, which over a period of 12 years, have to be reduced to 26%. Foreign Investment is permitted as in the case of other private sector commercial banks. After the small finance bank reaches the net worth of Rs.500 crore, listing of its shares on a stock exchange will be mandatory within three years of reaching that net worth.

SFBs are full fledged banks in contrast to payments banks created around the same time. Hence, they are subject to all prudential norms and regulations of RBI as applicable to existing commercial banks like maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).

The target group of SFBs are similar to that of Local Area Banks. They are required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank. At least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs. 25 lakh.

However, SFBs can also undertake other non-risk sharing simple financial services activities, not requiring any commitment of own fund, such as distribution of mutual fund units, insurance products, pension products, etc. with the prior approval of the RBI and after complying with the requirements of the sectoral regulator for such products. The small finance bank can also become a Category II Authorized Dealer in foreign exchange business for its clients’ requirements. However it cannot set up subsidiaries to undertake non-banking financial services activities.

There will not be any restriction in the area of operations of small finance banks; however, preference will be given to those applicants who in the initial phase set up the bank in a cluster of under-banked States / districts. it is stipulated that at least 25 per cent of its branches shall be in unbanked rural centers.

Equitas Small Finance Bank Ltd and Ujjivan Small Finance Bank Ltd are listed entities.Mumbai-based Suryoday Small Finance Bank Ltd, Varanasi based Utkarsh Small Finance Bank and Kerala based ESAF Small Finance Bank Ltd have all started operations by first half of 2016. North East Small Finance Bank Limited has commenced operations as a small finance bank with effect from October 17, 2017.

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