Conversion to Small Finance Banks

  • December 19, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Conversion to Small Finance Banks

Subject :Economy

Context:

Urban co-operative banks (UCBs) seem to have said thanks but no thanks to the Reserve Bank of India for its scheme for their voluntary transition into small finance banks (SFBs).

Concept:

On-tap Licensing?

  • The detailed scheme for voluntary transition of UCBs into SFBs was announced in late September 2018.
  • Capital Requirement: A minimum of Rs. 200 crores in paid-up voting equity capital / net worth are required.
  • The initial requirement of net worth for Primary (Urban) Co-operative Banks (UCBs) desiring to transition into SFBs voluntarily is Rs. One hundred crores must be enhanced to Rs. 200 crores within five years of the start of business.
    • The priority sector lending (PSL) norms for UCBs are at par with SFBs
  • Scheduled Bank Status for SFBs: SFBs will receive scheduled bank status as soon as their activities begin.
  • Payment Banks Conversion to SFBs: Payment banks that are otherwise eligible under these criteria can apply for conversion to SFBs after five years of operations.

Small Finance Banks:

  • These are the financial institutions which provide financial services to the unserved and unbanked region of the country.
  • Registered as a public limited company under the Companies Act, 2013.
  • Needs to open at least 25% of its banking outlets in unbanked rural centres.
  • Required to extend 75% of its adjusted net bank credit to the Priority Sector Lending (PSL).
  • At least 50% of its loan portfolio should constitute loans and advances of up to Rs. 25 lakhs.
  • The maximum loan size and investment limit exposure to a single and group debtor would be restricted to 10% and 15% of its capital funds, respectively.
  • Subject to Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements.
  • Promoters must contribute a minimum 40% equity capital and should be brought down to 30% in 10 years.
  • Minimum paid-up capital would be Rs 100 cr.
  • Capital adequacy ratio should be 15% of risk weighted assets.
  • Foreign shareholding capped at 74% of paid capital, FPIs cannot hold more than 24%.
  • Eligibility for Setting up SFBs:
    • Resident individuals/professionals with 10 years of experience in banking and finance.
    • The companies and societies owned and controlled by residents.
    • Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), Local Area Banks (LABs) and payment banks that are owned and controlled by residents.
  • What can they do?
    • Take small deposits and disburse loans.
    • Distribute mutual funds, insurance products and other simple third-party financial products.
    • Lend 75% of their total adjusted net bank credit to priority sector.
    • Maximum loan size would be 10% of capital funds to single borrower, 15% to a group.
    • Minimum 50% of loans should be up to 25 lakhs.
  • What they cannot do?
    • Lend to big corporates and groups.
    • Cannot open branches with prior RBI approval for first five years.
    • Other financial activities of the promoter must not mingle with the bank.
    • It cannot set up subsidiaries to undertake non-banking financial services activities.
    • Cannot be a business correspondent of any bank.
  • Regulations:
    • Reserve Bank of India Act, 1934;
    • Banking Regulation Act, 1949;
    • Foreign Exchange Management Act, 1999;
    • Payment and Settlement Systems Act, 2007;
    • Credit Information Companies (Regulation) Act, 2005;
    • Deposit Insurance and Credit Guarantee Corporation Act, 1961;
    • Other relevant Statutes and the Directives issued by the Reserve Bank of India (RBI) and other regulators from time to time.
Conversion to Small Finance Banks economy