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Small Finance Banks aiming to become Universal Banks

  • Context (IE): The RBI stated that small finance banks (SFBs) must have a minimum net worth of Rs 1,000 crore to become universal banks under on-tap licensing norms.

Other criteria for SFBs to become a universal bank

  • Must have scheduled status and a five-year satisfactory performance track record.
  • Their shares must be listed on a recognised stock exchange.
  • They should have posted a net profit in the last two financial years.
  • They should have gross non-performing assets (GNPA) ≤3% and net non-performing assets (NNPA) ≤1%, respectively, in the last two financial years.
  • There’s no mandatory requirement for an eligible SFB to have an identified promoter, but existing promoters must continue.
  • Any dilution plan for promoter shareholding already approved by the RBI should not change.
  • SFBs with diversified loan portfolios are preferred by the RBI.

Small Finance Banks

  • SFBs are a category of scheduled commercial banks that primarily cater to the financial needs of small business units, micro and small industries, and unorganised sector entities.
  • SFBs are regulated by the RBI under the RBI Act of 1934 and the Banking Regulation Act of 1949.
  • An SFB is established as a private limited company under the Companies Act of 2013.
  • Small Finance Banks offer basic banking services such as Savings Accounts, Current Accounts, Fixed Deposits, Recurring Deposits, Loans, etc. (Payment banks & NBFCs cannot Lend).
  • SFBs are subject to all prudential norms and regulations of RBI applicable to existing commercial banks, including maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
  • The minimum paid-up equity capital requirement is INR 200 crores, except for SFBs converted from Urban Cooperative Banks, which require only INR 100 crore.
  • SFBs can be promoted by individuals, corporates, trusts, or societies.
  • SFBs are required to extend 75% of the credit to sectors eligible for classification as priority sector lending by the RBI (Commercial bank 40%).
  • At least 25% of the branches of any small finance bank should be located in rural areas where banking services are absent or not prevalent.
  • 50 % of loans extended by them are to be less than INR 25 lakhs.
  • SFBs can undertake non-risk-sharing financial services such as the distribution of mutual fund units, insurance products, pension products, etc.
  • SFBs can set up dealerships in the foreign exchange business.
  • Existing NBFCs, microfinance institutions, and local area banks can opt for conversion into Small Finance Banks.
  • On-tap licensing: This means that the window for getting a bank license from RBI is open throughout the year.
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