Small Finance Banks - Guidelines, Roles and Jobs

Small Finance Banks
The Reserve Bank of India (RBI) granted 10 entities in-principle licences to open so-called small finance banks—another move towards expanding access to financial services in rural and semi-urban areas. They have to set up small finance banks under the “Guidelines for Licensing of Small Finance Banks in the private sector” (Guidelines) issued on November 27, 2014. All the Guidelines are mentioned below:

Names of selected applicants for Small Finance Banks (Alphabetical order)
Au Financiers (India) Ltd., Jaipur
Capital Local Area Bank Ltd., Jalandhar
Disha Microfin Private Ltd., Ahmedabad
Equitas Holdings P Limited, Chennai
ESAF Microfinance and Investments Private Ltd., Chennai
Janalakshmi Financial Services Private Limited, Bengaluru
RGVN (North East) Microfinance Limited, Guwahati
Suryoday Micro Finance Private Ltd., Navi Mumbai
Ujjivan Financial Services Private Ltd., Bengaluru
Utkarsh Micro Finance Private Ltd., Varanasi

Guidelines for Licensing of Small Finance Banks in the private sector
The Reserve Bank of India released on its website today, the Guidelines for Licensing of Small Finance Banks in the Private Sector.

Key features of the Small Finance Bank guidelines are:
i) Objectives of Small Finance Banks:
The objectives of setting up of small finance banks will be to further financial inclusion by
(a) provision of savings vehicles, and (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.

Small finance banks will offer basic banking services, accepting deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries, and entities in the unorganized sector

ii) Eligible promoters Small Finance Banks:
Resident individuals/professionals with 10 years of experience in banking and finance; and companies and societies owned and controlled by residents will be eligible to set up small finance banks.
Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents can also opt for conversion into small finance banks.
Promoter/promoter groups should be ‘fit and proper’ with a sound track record of professional experience or of running their businesses for at least a period of five years in order to be eligible to promote small finance banks.

iii) Small Finance Banks Scope of activities :
The small finance bank shall primarily 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.
There will not be any restriction in the area of operations of small finance banks.

iv) Small Finance Banks Capital requirement: 
The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore.

v) Promoter's contribution: 
The promoter's minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40 per cent and gradually brought down to 26 per cent within 12 years from the date of commencement of business of the bank.

vi) Foreign shareholding: 
The foreign shareholding in the small finance bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.

vii) Prudential norms :
The small finance bank will be subject to all prudential norms and regulations of RBI as applicable to existing commercial banks including requirement of maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). No forbearance would be provided for complying with the statutory provisions.
They need to maintain a cash reserve ratio (CRR), or portion of deposits to be set aside with the central bank, and statutory liquidity ratio (SLR), or the portion of deposits to be invested in government securities, as stipulated for commercial banks.

The small finance banks will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.
Priority sector, which includes agriculture, small enterprises and low-income earners. Commercial banks have to mandatorily lend 40% of their net bank credit to such sectors.

At least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs. 25 lakh.

viii) Transition path: 
If the small finance bank aspires to transit into a universal bank, such transition will not be automatic, but would be subject to fulfilling minimum paid-up capital / net worth requirement as applicable to universal banks; its satisfactory track record of performance as a small finance bank and the outcome of the Reserve Bank’s due diligence exercise.

Other Information related to Small Finance Banks
Larger financial services firms such as Dewan Housing Finance Ltd, IIFL Holdings Ltd, SKS Microfinance Ltd and UAE Exchange and Financial Services Ltd did not qualify for the licences. No publicly traded entities have been included in the list.

Eight out of the 10 entities granted the in-principle approval, which is valid for 18 months, are microfinance institutions.
The exceptions are Capital Local Area Bank Ltd, which operates in five districts of Punjab, and Au Financiers. Local-area banks are institutions that lend in contiguous districts, mobilizing rural savings and making them available for local investments. Au Financiers is a non-banking financial company.

For microfinance firms that give tiny loans to low-income earners, the key incentive for converting into small finance banks will be the access they gain to deposits; they will also be able to offer a wider range of loan products to customers.

The licensing of small finance banks follows 11 payment bank licences given out by RBI to provide basic savings, and deposit, payment and remittance services to people without access to the formal banking system. Payments banks will not be in the business of lending.

Both initiatives are aimed at furthering financial inclusion, which the Bharatiya Janata Party-led National Democratic Alliance government has made one of its top priorities since it assumed office in May 2014.

It has launched the Pradhan Mantri Jan Dhan Yojana (PMJDY) to ensure a bank account for every household, offering accidental insurance cover of Rs.1 lakh, life insurance cover of Rs.30,000 and easy transfer of money across India as sweeteners. As of 12 August, 175.7 million bank accounts had been opened under the scheme, according to the PMJDY website.

Small Finance Banks - Founder's Vision : 
India's first small finance bank - Capital Small Finance Bank.
Capital Local Area Bank has emerged as the first bank to have received licence from the Reserve Bank of India to start small finance bank.
Capital Small Finance Bank - "We plans to start its operations on April 13, on the auspicious day of Baisakhi. The bank plans to open 10 new branches on the first day of operation"
- Sarvjit Singh Samra, managing director of the Capital Small Finance Bank told ET.

So far, Capital Local Area Bank operated as a local area bank with restrictions on opening branches. As a small finance bank it can open branches across India.

As present the bank has 44 branches and three more would be opened by March 31, 2016. We will close the year with total business (deposits and advances) of Rs 3000 crore, he said.

Capital Small Finance Bank's Vision: Samra said that in the next five years the bank plans to have 216 branches and total business of Rs 11800 crore. Also during the first five years of the operations the bank will focus on northern region. Currently, the bank is operating in Punjab's five districts -- Jalandhar, Kapurthala, Hoshairpur, Ludhiana and Amritsar.

Ujjivan Financial Services
After setting up a bank, it would take nearly two years to merely stabilize the operation
- Samit Ghosh, founder and managing director, Ujjivan Financial Services. 

Ujjivan’s loan book stands at about Rs.3,300 crore and it plans to continue its focus on smaller borrowers,  According to him -  “The next 18 months are going to be a lot of hard work. We have to figure out ways to bring down the 90% foreign shareholding in the company since RBI has strict guidelines for it. We will be looking at various options including private placements,” said Ghosh.

According to the current policy, the aggregate foreign investment in a private sector bank from all sources is capped at 74% of its paid-up capital.

Disha Microfin
Ahmedabad-based Disha Microfin said its focus will be to expand in the central and western Indian states where there is a huge base of unbanked customers.

“The initial challenge will be to restructure and transform into a bank from a non-banking financial institution and offer multiple banking products,”
- Rajeev Yadav, director of Disha group, which runs the Ahmedabad-based microfinance company.

Small Finance Banks in India
In total, 72 entities applied for a small finance bank licence. The applications were reviewed by a committee headed by former RBI deputy governor Usha Thorat.

“It is clear from the list (of licensees) that the RBI’s bias is towards people who have proved themselves in the priority lending space. Since larger banks have always felt it to be a drag on their books, these entities will be able to fill that gap and serve smaller customers,”
- Abizer Diwanji, partner and national leader, financial services, EY.

According to Diwanji, the ability to maintain a full-fledged treasury department would be one of the advantages of turning into a small finance bank, apart from access to deposits and the opportunity to offer a wider range of loan products.

“But these will also be the biggest challenges, since these are players who have not had much experience in these services,” Diwanji said.

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