To take further its earlier experiment with small banks, the Reserve Bank of India on Thursday unveiled draft guidelines for setting up such banks.

The aim of the small bank will be to provide savings instruments to the “un-served and under-served” sections of the population and give loans to small farmers, micro and small enterprises, and other un-organised sector businesses, the RBI said.

According to the RBI, India experimented with small banks as early as 1996, and four local area banks are functioning satisfactorily.

In the latest round, the RBI said, “Local focus and the ability to serve smaller customers will be the key criteria in licensing such banks.”

Prudential guidelines Successful entities will need to seek the central bank’s approval for expanding its branches in the initial three years, after which the RBI might relax this requirement based on its experience. The RBI said while it will be mandatory for small banks to maintain a capital adequacy of 15 per cent of its risk weighted assets on a continuous basis, they will be computed on relatively simpler Basel-1 standards since such banks will not deal with sophisticated products.

Further, the small bank will be subject to all regulations of RBI as applicable to existing commercial banks, including the maintenance of Cash Reserve Ratio and Statutory Liquidity Ratio.

The RBI said the promoters’ initial contribution should be at least 40 per cent of the bank’s total paid-up capital. In case it is more, the promoter will be required to bring down the holding to 26 per cent within 12 years from the date of commencement of business of the bank.

“The small bank will be required to have a well diversified portfolio of loans and advances spread over its area of operations…At least 50 per cent of its loan portfolio should constitute loans and advances of size up to ₹25 lakh to extend loans primarily to micro enterprises,” the RBI said.

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