Small banks can lend to small businesses

The country’s financial inclusion mission got a step further with the Reserve Bank of India releasing its final guidelines on small banks on Thursday.

With no restriction in the area of operations, “a small finance bank shall primarily undertake basic banking activities of acceptance of deposits and lending to un-served and under-served sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities,” RBI said in a statement.

Small banks will be allowed to give loans, which is not permitted for payment banks.

Resident individuals/professionals with 10 years of experience in banking and finance, as well as companies and societies owned and controlled by residents will be eligible to be promoters of small finance banks. Existing non-banking finance companies (NBFCs), micro finance institutions (MFIs), and local area banks that are owned and controlled by residents can also apply but cannot co-exist as both NBFC and small finance bank, RBI said.

Players, including micro finance institutions, financers for commercial vehicles, loan against property, etc… are likely to apply for small finance banks.

For a small finance bank, the promoter’s minimum initial contribution to the paid-up equity capital shall at least be 40 per cent, which should be brought down to 30 per cent within 10 years and 26 per cent within 12 years.

If at commencement of the bank, the promoter holding is in excess of 40 per cent, it should be brought down to 40 per cent within a period of five years.

Earlier, this timeframe was three years. However, the RBI will be flexible if the existing NBFCs / MFIs / LABs have diluted the promoters’ shareholding to below 40 per cent, but above 26 per cent, due to regulatory requirements or otherwise, RBI may not insist on the promoters’ minimum initial contribution of 40 per cent.

“This is positive as many players who wanted to apply for a licence shared concerns over promoter shareholding limit of 40 per cent and the restricted area of operations. The guidelines are practical and have widened the horizon of potential applicants,” said Vibha Batra, Group Head, Financial sector ratings, ICRA.

The minimum paid-up equity capital for small finance banks shall be ₹100 crore with a minimum capital adequacy ratio of 15 per cent of its risk weighted assets, Tier-I capital of at least 7.5 per cent and Tier II capital should be limited to a maximum of 100 per cent of total Tier-I capital.

The small finance banks will be required to extend 75 per cent of its Adjusted Net Bank Credi to priority sector lending sectors including agriculture, micro loans, rural home loans, education loans, etc.

Further, the RBI has specified a cap of ₹25 lakh on at least 50 per cent of the loan portfolio.

All prudential norms and regulations of the RBI as applicable to existing commercial banks, including requirement of maintenance of cash reserve ratio and statutory liquidity ratio (SLR) will be applied with “no forbearance”.

The foreign shareholding in the small finance bank would be according to the foreign direct investment policy for private sector banks, which is 49 per cent through automatic route and maximum 74 per cent after approval.

Also, banks are prohibited from creating floating charge on their assets.