ON TAP LICENSE FOR UNIVERSAL SFB’s

ON TAP LICENSE FOR UNIVERSAL SFB’s

Subject: Economy

Context: The Reserve Bank of India (RBI) on Thursday unveiled the names of eight applicants for ‘on-tap’ licence of universal banks and small finance banks.

Concept:

What is On Tap license?

• On-tap licensing means that the window for getting a bank license from RBI is open throughout the year.
• Earlier, RBI used to invite applications for giving bank licenses, and prospective players submitted their applications within a fixed time-frame as prescribed by RBI. This arrangement was not open all the time.
• Now, virtually anyone, who fulfils the criteria, can apply for a bank license anytime.

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.

Small Finance Banks (SFBs):

• Small Finance Banks are the financial institutions which provide financial services to the unserved and unbanked region of the country.
• They are registered as a public limited company under the Companies Act, 2013.
• Eligible candidates for setting up SFB are:

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.

• It needs to open at least 25% of its banking outlets in unbanked rural centres.
• The bank will be 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 ₹ 25 lakhs.
• The maximum loan size and investment limit exposure to a single and group would be restricted to 10% and 15% of its capital funds, respectively. They cannot extend large loans.
• If the initial shareholding by promoters in the bank is in excess of 40% of paid-up voting equity capital, it should be brought down to 40% within a period of 5 years.
• The small finance banks will be subject to Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).