The Reserve Bank of India recently has allowed payments banks in the direction of applying for small finance bank (SFB) licenses, providing they meet the standards. As per the newly drafted guidelines for on-tap licensing of private sector SFBs, the promoter of a payments bank is qualified in order to set up an SFB, if both banks come under the non-operating financial holding company (NOFHC) structure.
The existing rule doesn’t permit payments banks to give and deposits are capped at Rs1 lakh each customer. A small finance bank license would provide such enterprises access towards more deposits as well as towards boosting their profitability, which is at present under pressure.
The Reserve Bank of India also revised the minimum paid-up capital prerequisite for SFBs to Rs 200 crore rather than Rs100 crore previously. It stated the promoter is required to hold at least of 40% of the paid-up voting equity capital for 5 years. In case the initial promoter shareholding is more than 40%, it must be brought down to 40% within a period of 5 years, 30% within 10 years, as well as 15% in 15 years.
Bring into line the norms with those of universal banks, the RBI stated promoters requiring to set up an SFB can do so either as a standalone entity or under a holding corporation, which would act as the promoting entity of the bank. Though, if there is an intermediate corporation amid the SFB and its promoting entity, it must be a non-operative financial holding company (NOFHC).
The RBI has specified that the major criteria for licenses would be the entity’s capability to serve smaller clients and those SFBs might be a more appropriate vehicle for local entities or entities that are focused on lending in the direction of unserved or underserved sections of society. Therefore, proposals from public sector entities and big industrial house/business groups, which includes from non-banking financial companies (NBFCs) promoted through them, entities promoted through states, or subsidiaries of development financial institutions, shall not be entertained.
A business group who has assets of Rs 5,000 crore or above with non-financial business accounting for 40% or more relating to total assets or income shall be considered to be a big industrial house or business group, and would not be permitted. The RBI shall not permit joint ventures by means of dissimilar promoter groups to set up SFBs either.
An SFB could become a universal bank; however, it must meet the net value prerequisite as applicable towards universal banks, also its satisfactory track record of performance as an SFB for a minimum period of 5 years.
The RBI had stated that on a transition into a universal bank, it shall be subjected to all the standards which include the NOFHC structure.
Primary (urban) co-operative banks that aim to convert into SFBs were allowed to continue with a minimum paid-up equity capital of Rs 100 crore to begin with, but they are required to increase their minimum net worth to Rs 200 crore within 5 years.
The revised drafted guidelines which have been issued after reviewing the performance of the 10 SFBs is in existence now.
RBI had stated that whether a promoter ceases towards being a promoter or an exit from the bank, after finishing the lock-in period of 5 years, shall rely on the Reserve Bank of India’s supervisory and regulatory comfort or discomfort as well as SEBI regulations in this regard.
The central bank maintained that SFBs must be listed within 3 years of reaching a net value of Rs 500 crore.
The RBI also permitted primary urban cooperative banks towards converting into SFBs, provided they abide with the on-tap licensing guidelines. The net worth of such SFBs shall be minimum of Rs100 crore and needs to be augmented to Rs 200 crore within 5 years from the beginning of the business.
Also, SFBs who has a net worth of less than Rs 500 crore can also get their shares listed voluntarily, subject to fulfillment of the conditions of the capital markets regulator.
The foreign shareholding in the small finance bank shall be inconsistent with the extant foreign direct investment (FDI) policy for private sector banks.
SFBs furnishes basic banking services, accepting deposits as well as lending to unserved and underserved sections, which includes small businesses, small and marginal farmers, micro and small industries, as well as the unorganized sector.
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