RBI releases draft guidelines for ‘on tap’ licensing of Small Finance Banks

The Reserve Bank of India (RBI) on September 13 released draft norms for ‘on tap’ licensing of Small Finance Banks (SFBs), which will allow applicants to approach the banking regulator on an ongoing basis.

A SFB is a basic banking entity that provides bare minimum financial services with focus on financial inclusion and expansion in unbanked geograhical areas. RBI said that it will prefer applicants who, in the initial phase, set up the bank in a cluster of under-banked states/districts, such as in the North-East, East and Central regions of the country.

“After the initial stabilisation period of five years, and after a review, RBI may liberalise the scope of activities of the small finance banks,” the central bank said.

RBI said that it will prefer promoters having diversified shareholding and a time frame for listing of the bank.

The minimum paid-up voting equity capital for SFBs shall be Rs 200 crore, of which minimum 40 percent will be held by promoters for a lock-in period of five years. Listing will be mandatory within three years after the bank reaches net worth of Rs 500 crore. SFBs will require to maintain minimum capital adequacy ratio of 15 percent of its risk weighted assets. Basel-II norms will apply on SFBs, according to the draft.

While payments banks can apply to set up a SFB under the holding company structure, universal banks will not be allowed to take the same approach. Also, SFB cannot be a Business Correspondent (BC) for another bank.

Indian citizens with at least 10 years of experience in banking and finance at a senior level can apply for a banking license, while companies with track record of five years will be eligible as promoters, according to the proposed norms. Others include existing non-banking finance companies (NBFCs), micro finance institutions and local area banks.

However, joint ventures by different promoter groups for the purpose of setting up SFBs will not be permitted. “In taking a view on whether the companies, either as promoters or investors, belong to a large industrial house or to a company connected to a large industrial house, the decision of the RBI will be final,” RBI said.

The applicants will have to pass RBI’s “fit and proper” test in order to be eligible for a license. This will require a successful track record of professional experience for at least past five years.

The RBI had earlier issued guidelines for licensing of SFBs on November 2014, following which it had granted in-principle approvals to 10 applicants.