Small Finance 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.

About Small Finance Banks

• Small Finance Banks 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.
• They are regulated by the RBI under the RBI Act of 1934 and the Banking Regulation Act of 1949.

• An SFB is established as a public 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.

Criteria for Small Finance Banks to become 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.