Small Finance Banks

Why in news?

• The Reserve Bank of India (RBI) has recently announced its decision to reject three applications for setting up Small Finance Banks as these applications were found not suitable for granting of in-principle approval to set up SFBs.
• RBI received approximately a dozen applications under the guidelines for 'on-tap' Licensing of Universal Banks and SFBs.

What are Small Finance Banks?

• Small Finance Banks is a specific segment of banking created by RBI under the guidance of Government of India with an objective of furthering financial inclusion by primarily undertaking basic banking activities to un-served and underserved sections.
• They target sections like small business units, small and marginal farmers, micro and small industries and unorganized entities.

Who can create SFBs?

• Resident individuals/professionals with 10 years of experience in banking and finance.
• The firms must have a capital of at least ?200 crore.
• Companies and societies owned and controlled by residents will be eligible to set up small finance banks.
• Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents can also opt for conversion into small finance banks.

How they compare with scheduled commercial banks?

• Like other commercial banks, these banks can undertake all basic banking activities including lending and taking deposits.
• The small finance bank will be subject to all prudential norms and regulations of RBI as applicable to existing commercial banks including requirement of maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
• Just like SCBs, SFBs will not be restricted to any region and can operate throughout the country.
• The small finance banks will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank, higher then SCBs.
• Just like SCBs,
• At least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs. 25 lakh.

PRACTICE QUESTION

With regard to Small Finance Banks (SFB), which of the following is not a feature of small finance banks?

1.The Cash reserve ratio (CRR) and statutory liquidity ratio(SLR) norms of the central bank are applicable to the SFB.

2.75 per cent of its Adjusted Net Bank Credit (ANBC) should be towards the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.

Select the correct answer using the code given below.

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer