Small Finance Banks : Big Small Steps towards “Financial Inclusion” and “Inclusive Banking”
The Reserve Bank of India (RBI) has granted ‘in-principle’ approval for 10 companies to set up small finance banks. The approval will be valid for 18 months to enable the applicants to comply with the requirements.
Differentiated banking in the country
In last few months Reserve Bank of India and Government of India has taken few steps to further differentiated banking in the country. This is a part of its broader plan to kick off differentiated banks in the country, the Reserve Bank of India (RBI) on 16 September, 2015 granted small finance bank licenses to 10 entities, eight of which are microfinance institutions. Last month, the central bank granted payments bank license to 11 entities.
(i) Universal banking license: Two players — IDFC and Bandhan (April 2, 2014)
(ii) Payments banks: 11 players – to help deepen financial inclusion (August 19, 2015)
(iii) Small finance banks: 10 players — to undertake basic banking activity for under-banked areas (September 16, 2015)
The 10 “in principle approval” for Small Finance Bank
- Au Financiers (India), Jaipur
- Capital Local Area Bank, Jalandhar
- Disha Microfin, Ahmedabad
- ESAF Microfinance and Investments, Chennai
- Janalakshmi Financial Services, Bengaluru
- RGVN (North East) Microfinance, Guwahati
- Suryoday Micro Finance, Navi Mumbai
- Ujjivan Financial Services, Bengaluru
- Utkarsh Micro Finance, Varanasi
Small Finance Banks ( SFB)
Small finance banks will be similar to commercial banks and will undertake basic banking activities of accepting deposits and lending to unserved and under-served sections. The objectives of setting up of Small Finance Bank will be primarily for furthering “financial inclusion by
(i) Provision of savings vehicles primarily to unserved and underserved sections of the population. At least 25% of its branches in unbanked rural centers with no restriction in areas of operation. These applicants will not have hindrance to expand to other regions in due course
(ii) Supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganized sector entities, through high technology-low cost operations
(iii) Non-risk sharing simple financial services activities not requiring any fund commitment, such as distribution of MFs, insurance products, pension products, etc.
(iv) The Small Finance Bank can also become a Category II Authorized Dealer in foreign exchange business
Focus is on Bank the un-banked
The RBI received 72 applications for small finance banks. An important factor remained reach into un-banked areas and under-served sections of the population. It is expected that the Small Finance Bank should primarily be responsive to local needs. The Small Finance Bank will be required to use the word “Small Finance Bank” in its name in order to differentiate it from other banks.
Build Capabilities for Priority Sector Lending
According to RBI norms, small finance banks will be allowed to undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities. It is mandated that 75 per cent of the loans should be extended to sectors that are classified under priority sector. The PSL targets are significantly higher compared to the scheduled commercial banks i.e., 40 percent of ANBC. Therefore, a Small Finance Bank would need to quickly build capabilities to lend to these sectors in a cost-effective sustainable way.
Regulatory norms and Go to Market approach
Small finance bank will be subject to all prudential norms and regulations as applicable to commercial banks, including the requirement of maintaining cash reserve ratio and statutory liquidity ratio
The minimum paid up voting equity capital has been fixed at Rs 100 crores with a minimum CAR of 15% on risk weighted assets. Once the net worth reaches Rs. 500 Crore, listing will be mandatory within 3 years of reaching the net worth. For others listing is voluntary. The aim is to create banking entity which is adequately capitalized, financially inclusive and has a competitive business model.
The promoter’s minimum initial contribution to at least 40% locked in for 5 years – need to be brought down to 30% of the paid-up voting equity capital within a period of 10 years, and to 26% within 12 years.
Promoter can set of Small Finance Bank and Payments Bank
While the RBI may allows for a promoter/ promoter group to run both a Small Finance Bank as well as a Payments Bank under a holding company (NOFHC), the guidelines do not allow a promoter/ promoter group to hold a Small Finance Bank as well as a Universal Bank license at the same time.
Small Finance Banks cannot be Business Correspondent
The Small Finance Bank cannot be a Business Correspondent (BC) for another bank. However, it can have its own BC network Priority Sector Lending (PSL)
Strong Corporate Governance
The Board of the Small Finance Bank should have a majority of independent directors,
The Small Finance Bank should comply with the corporate governance guidelines including ‘fit and proper’ criteria for Directors as issued by RBI from time to time
The voting rights in private sector banks are capped at 10%, which can be raised to 26% in a phased manner by the RBI. Any acquisition of 5% or more of equity shares in a private sector bank will require prior approval of RBI.
(iv) SFB cannot set up subsidiaries to undertake non-banking financial services in the areas of operation of Small Finance Bank;
The operations of the Small Finance Bank should be technology driven from the beginning, conforming to generally accepted standards and norms; while new approaches (such as for data storage, security and real time data updates) are encouraged, a detailed technology plan for the same should be furnished to RBI. The Small Finance Bank should Customer Grievances Cell to handle customer complaints. The Small Finance Bank will come under the purview of RBI’s Banking Ombudsman Scheme, 2006.
Universal Banks of “tomorrow”
The Regulator would want Small Finance Bank to become the Universal Bank of tomorrow. In this way, the Regulator would have an excellent opportunity to witness and assess the growth of a Small Finance Bank and if that bank is capable of making the transition to the next level. For the Small Finance Banks its an opportunity to transition into “Full-fledged Bank” of tomorrow.
The opportunity is “massive”. The Priority Sector Business target for the year is more than Rs 20,00,000 Crore and the liabilities business is growing in Rural India. The Rural India not only offers Agriculture, Agro-processing, Dairy, Non-Farm, Artisans segment but also opportunities in automobiles, retail, FMCG, Heath-care, education, consumer durables, IT & eCommerce..etc.
The primary challenge of the Small Finance Banks will be to generate Low Cost Deposits. However they have an opportunity to be far more innovative, introduce customised & flexible product offerings and build a strong customer @ centre approach.
It’s matter of time – Today’s Rural will become tomorrow’s Urban, as far as business and banking opportunities are concerned. The “Rural Business” will propel the next phase of banking growth in India.
Head, Agribusiness Group,RBL Bank, Mumbai
The views expressed in this article are purely personal.