-Kanakprabha Jethani | Executive
The Reserve Bank of India (RBI) has issued draft guidelines for ‘on tap’ licensing of Small Finance Banks (SFBs). The guidelines are largely similar to the existing guidelines for licensing of SFBs. However, the major difference is that the licensing will be allowed ‘on tap’. Further, there are certain changes in the eligibility requirements as well. The following write-up intends to answer all the questions relating to licensing of SFBs under the new ‘on tap’ mechanism.
What is ‘on-tap’ licensing?
Under the existing framework, the RBI issues licences for SFBs in batches i.e. all the applications are reviewed in a decided time frame and approvals for a number of SFBs are issued at once. The RBI doesn’t give out approvals as and when applications are received. Rather, when sufficient number of applications are received, they are reviewed at once and the applications that satisfy RBI’s criteria are issued with licenses.
Under the ‘on-tap’ mechanism, RBI will initiate the review of applications as and when they are received. Individual applications will be reviewed and licenses will be issued accordingly.
Who is eligible to apply?
|Resident individuals||Atleast 10 years’ experience in banking and finance sector at senior level|
|Professionals who are Indian citizens||Atleast 10 years’ experience in banking and finance sector at senior level|
|Companies/societies owned and controlled by residents||Having successful track record of running their business for atleast 5 years|
|Existing NBFCs, Micro Finance Institutions (MFIs), Local Area Banks (LABs)||-in private sector + controlled by residents + successful track record of running the business for atleast 5 years|
|Primary Urban Co-operative Banks (UCBs)||As per the scheme for voluntary transition.|
|Fit and Proper Criteria:|
|Promoters/ promoter group||Past record of sound credentials and integrity, financial soundness and successful track record of professional experience or of running their business for atleast 5 years|
Who cannot apply?
Joint ventures by different promoter groups for purpose of setting up SFB. Public sector entities, large industrial houses or business groups, bodies set up under state legislature, state financial corporations, etc. Group with assets of Rs. 5000 crores or more+ non financial business accounting for 40% or more
What will be the structure of SFB?
An SFB maybe floated either as a standalone entity or under a holding company, which shall act as the promoting entity of the bank. Such holding company shall be a Non-Operative Financial Holding Company (NOHFC) or be registered with the RBI as NBFC-CIC.
What activities can an SFB carry out?
Primarily, an SFB is allowed to carry out basic banking activities.
Apart from the primary functions, SFBs can also undertake non-risk sharing simple financial activities, not requiring commitment of their own funds, after obtaining approval of the RBI. Also, they are allowed to become Category II Authorised Dealer in foreign exchange business.
An activity that involves commitment of funds of the SFB, such as issue of credit cards, shall not be allowed.
What will be the capital structure in SFB?
|Minimum paid-up equity capital:|
|All applicants||Rs. 200 crores|
|For UCBs converting into SFB||Initially Rs. 100 crores, which shall be required to be increased to Rs. 200 crores within 5 years|
|Capital Adequacy Ratio:|
|Tier I capital||7.5% of total risk-weighted assets|
|Tier II capital||Maximum 100% of tier I capital|
|Capital||15% of total risk- weighted assets|
|Promoters’ holding||Minimum 40% of paid-up voting equity capital
· Bring down to 30% in 10 years
· Bring down to 15% in 15 years
|In case of conversion of NBFC/MFI to SFB, if promoters’ shareholding is maintained below 40% but above 26% due to regulatory requirements or otherwise, the same shall be acceptable. Provided that promoters’ shareholding doesn’t fall below 20%.|
|Lock-in on promoters’ minimum holding||5 years|
|If promoters’ shareholding > 40%||Bring down to 40%
· within 5 years from commencement of business (in case of other SFB)
· within 5 years from the date paid-up capital of Rs. 200 crores is reached (in case of conversion from UCB)
|No person other than promoters shall be allowed to hold more than 10% of the paid-up equity capital.|
|Under automatic route||Upto 49%|
|Government route||Beyond 49% upto 74%|
|Atleast 26% of the paid-up equity capital should be held by resident shareholders.|
Will the SFB be listed?
An application for listing of the SFB can be made voluntarily after obtaining approval of the RBI. However, on reaching a paid-up equity capital of Rs. 500 crores, listing shall be made mandatory.
What will be the compliance requirements for SFBs?
- Have in place a robust risk management system.
- Prudential norms as applicable to commercial banks shall be applicable.
- 75% of Adjusted Net Bank Credit (ANBC) shall be extended to priority sectors.
- The maximum loan size to a single person or group shall not be more than 10% of SFB’s capital funds.
- The maximum investment exposure to a single person or group shall not be more than 15% of SFB’s capital funds.
- Atleast 50% of loan portfolio should consist of small size loans (upto Rs. 25 lakhs per borrower).
- There should be no exposure of the SFB to its promoters, shareholder holding 10% or more of the paid-up capital, and relatives of promoters.
- Payments bank may make application to set up an SFB, provided that both the banks shall be under NOHFC structure.
- SFB cannot be a Business Correspondent of other banks.
Are there any specific compliance requirements for NBFCs/MFIs/LABs converting into SFB?
Following are the specific requirements to be complied with in case of conversion from NBFC/MFI/LAB:
- Have minimum paid-up capital of Rs. 200 crores. In case of deficiency, infuse the differential capital within 18 months.
- Convert the branches of NBFC/MFI to branches of the SFB within 3 years from commencement of operations.
- In case any floating charges stand in the balance sheet of the NBFC/MFI, the same shall be allowed to be carried until the related borrowings are matured.
How to make an application to set up an SFB?
An application shall be made to the RBI in Form III along with a business plan and detailed information of the existing as well as proposed structure, a project report regarding viability of the business of SFB and any other relevant information. The application shall be submitted to the RBI in physical form in an envelope superscripted “Application for Small Finance Bank” addressed to the Chief General Manager of the RBI.
In case, the application satisfies the RBI criteria, the fact of approval shall be placed on the RBI website. In case, the application is rejected, the applicant will be barred from making fresh application for a period of three years from such rejection.