On-tap’ licences to set up universal banks and small finance banks

May 18, 2022
Posted by: OptimizeIAS Team
Category: DPN Topics

On-tap’ licences to set up universal banks and small finance banks

Subject: Economy

Section: Monetary Policy

Six out of the 11 applications for ‘on-tap’ licences to set up universal banks and small finance banks were rejected by the Reserve Bank of India (RBI).

Concept:

An ‘on-tap’ facility means the RBI will accept applications and grant licenses for banks throughout the year. The policy allows aspirants to apply for universal bank license at any time, subject to the fulfillment of the set conditions.

Guidelines for ‘on tap’ Licensing of Universal Banks and Small Finance Banks in the Private Sector, were issued on August 1, 2016 and December 5, 2019 respectively.

Eligible entities seeking universal bank licences must be:

Individuals/entities with at least 10 years of experience in banking and finance at a senior level or private companies or groups with at least 10 years of successful track record.
Groups or companies applying for such licences must have assets of Rs 5,000 crore or above and the non-financial businesses don’t account for 40% or more of these assets.

To be eligible to apply for a small finance bank licence:

Individuals must have at least 10 years of experience in the banking and finance sector at senior levels. However, large industrial houses are excluded as eligible entities but are permitted to invest in the banks up to 10%.
Groups, companies, existing payments banks, non-banking finance companies, microfinance companies, local area banks and cooperative banks applying for these licenses must have at least five years of successful track record.

Small Finance Banks (SFBs):

Small Finance Banks are the financial institutions which provide financial services to the unserved and unbanked region of the country.

Existing non-banking financial companies (NBFC), microfinance institutions (MFI) and local area banks (LAB) can apply to become small finance banks.They are registered as a public limited company under the Companies Act, 2013.

Scope of Activities:

The small finance bank shall primarily undertake basic banking activities of acceptance of deposits and lending to small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
It can also undertake other non-risk sharing simple financial services activities, not requiring any commitment of own funds, such as the distribution of mutual fund units, insurance products, pension products, etc.
The small finance bank can also become an Authorised Dealer in foreign exchange business for its clients’ requirements.
75% of its net credits should be in priority sector lending and 50% of the loans in its portfolio must be ₹25 lakh.
Foreign shareholding will be allowed in these banks as per the rules for FDI in private banks in India.

Universal Banks:

Universal Banks are the financial entities like the commercial banks, Financial Institutions, Non-Banking Financial Companies (NBFCs), which undertake multiple financial activities under one roof, thereby creating a financial supermarket. The entities focus on leveraging their large branch network and offer a wide range of services under a single brand name/Bank’s name.

Universal banking is a system of banking where banks undertake a blanket of financial services like investment banking, commercial banking, development banking, insurance and other financial services including functions of merchant banking, mutual funds, factoring, housing finance, insurance etc. In simple words, Universal Banking means that Financial Institutions (FIs) and Banks are allowed to undertake all kinds of activities of banking, financing and related businesses.

RBIs universal bank licensing guidelines:

Individuals/professionals who are ‘residents’ and have minimum 10 years of experience in banking and finance at a senior level.
The initial minimum paid-up voting equity capital for a bank shall be ` five billion. Thereafter, the bank shall have a minimum net worth of ` five billion at all times.
The requirement of Non-Operative Financial Holding Company (NOFHC) is not mandatory for individual promoters or standalone promoting/converting entities who/which do not have other group entities.
Not less than 51% of the total paid-up equity capital of the NOFHC shall be owned by the Promoter/Promoter Group. No shareholder, other than the promoters/promoter group, shall have significant influence and control in the NOFHC.
The bank shall get its shares listed on the stock exchanges within six years of the commencement of business by the bank.
The bank is precluded from having any exposure to its promoters, major shareholders who have shareholding of 10 per cent or more of paid-up equity shares in the bank, the relatives of the promoters as also the entities in which they have significant influence or control.
The bank has to open at least 25 per cent of its branches in unbanked rural centres.
The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic scheduled commercial banks.
The board of the bank should have a majority of independent directors.
The validity of the in-principle approval issued by the Reserve Bank will be 18 months from the date of granting in-principle approval and would thereafter lapse automatically.