RBI Steps Towards Financial Inclusion : Small Financia Bank

Even after more than 65 years of India's Independence, there are so many people who are still not using banking services. They do not have accounts in banks, even do not hold any identity proof and still making the transaction with the old methodology. Hence, they are unable to access any financial products and services provided by banks or government.

In 2004, RBI formulated Khan Commission for incorporating financial inclusions. To practice financial inclusion, RBI has instructed all the banks to provide basic banking facilities like deposit, withdrawal, savings, and loan to all citizens with minimum documentation i.e. KYC (Know Your Customer) norms either with zero or minimum balance accounts. 

The government is trying to provide basic banking facilities to the weaker sections of our society so as to include them in the banking era. Only basic banking facilities can attract them to open their accounts in banks. Even with minimum KYC norms, if banks are not available in rural areas, opening an account would again be a big concern. RBI is trying to solve this problem by including the Business Correspondents (BC) to facilitate banking services in those areas where banks are either unable to open or cannot operate their branches due to cost constraints.

The idea of Payment Banks and Small Banks are unique contributions of our Central Banker which will promote Economic Development and Rural Banking in our backward economy. We can say, a revolution will take place in Indian Banking industry which will further increase Financial Inclusion in our country. Both Small and Payment Banks are the future of the banking sector and can easily achieve Financial Inclusion.

Small Finance Bank

A Step towards Financial Inclusion

On 16^th September 2015, the Reserve Bank of India (RBI) had granted 'in-principle' approval to the 10 applicants to set up Small Finance Banks. The RBI had received 72 applications for setting up small finance bank licenses. Last time, in 2014 RBI granted licenses to open Private Banks to two applicants: IDFC Ltd. & Bandhan Microfinance. The “in-principle” approval granted will be valid for 18 months to enable the applicants to comply with the requirements under the Guidelines and fulfill other conditions as may be stipulated by the RBI.

Following are the list of selected applicants

1. Au Financiers (India) Ltd., Jaipur

2. Capital Local Area Bank Ltd., Jalandhar

3. Disha Microfin Private Ltd., Ahmedabad

4. Equitas Holdings P Limited, Chennai

5. ESAF Microfinance and Investments Private Ltd., Chennai

6. RGVN (North East) Microfinance Limited, Guwahati

7. Suryoday Micro Finance Private Ltd., Navi Mumbai

8. Ujjivan Financial Services Private Ltd., Bengaluru

9. Utkarsh Micro Finance Private Ltd., Varanasi

10. Janalakshmi Financial Services Private Limited, Bengaluru

 

Note: The RBI issued a license to the bank under Section 22(1) of the Banking Regulation Act, 1949, to carry on the business of small finance bank (SFB) in India.

 

Background – Finance Minister Arun Jaitley announced in the Union Budget for 2014-2015 that - RBI will create a guideline for licensing small banks and payment banks. These banks will provide basic banking facilities to the small businesses, the unorganized sector, low-income households, farmers, and the migrant workforce in both urban and rural areas.

On 27^th November 2014, the Resave Bank of India (RBI) released the guidelines for Licensing of Small & Payments Banks. RBI received 72 applications for small finance banks and 41 applications for payments banks till 3rd February 2015, which included some of India's biggest companies. The idea for these two categories was first mooted by the Nachiket Mor Committee on Financial Inclusion.

Committee on Small Banks - The applications were analyzed and evaluated by an External Advisory Committee (EAC). The EAC for small banks was chaired by Usha Thorat, former deputy governor, RBI. 

Committee on Payment Banks - These applications were analyzed and evaluated by an External Advisory Committee (EAC). The EAC Committee for Payment Banks was chaired by Dr. Nachiket Mor, Director, Central Board of the Reserve Bank of India.

Small Banks - The main objective of Small Bank is to accelerate the initiative of financial inclusion in the rural areas. Also, such banks will deliver all kind of basic banking services such as deposits, lending, and supply of credit to small farmers, micro and small industries, the unorganized sector, and low-income sections of the population through high technology-low cost operations.

Eligibility criteria for Small Banks:

1. Resident individuals with 10 years of experience in banking and finance, companies and Societies will be eligible as promoters to set up small banks.

2. 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.

3. Promoter/promoter groups should be ‘fit and proper’ with a sound track record of professional experience or of running their businesses for at least a period of five years in order to be eligible to promote small finance banks.

Other Key guidelines and other conditions to set Small Finance Bank:

1. The small bank shall be registered as a public limited company under the Companies Act, 2013.

2. The new banks will have to use the words ‘small finance banks’ in its name.

3. Capital requirement - The minimum paid-up capital requirement for small banks is Rs. 100 crore.

4. Can provide basic banking activities – The small banks accept deposits as well as can offer loan products. Small banks can accept fixed deposits (FDs), term deposits, recurring deposits (RDs) and any non-resident Indian deposits.

5. Promoter's contribution: Promoter contribution would be at least 40 percent for the first five years. Excess shareholding should be brought down to 40 percent by the end of the fifth year, to 30 percent by the end of 10th year and to 26 percent in 12 years from the date of commencement of business

6. Foreign shareholding: The foreign shareholding in the small finance bank would be as per the Foreign Direct Investment (FDI) policy.

7. They cannot set up subsidiaries to undertake non-banking financial services activities.

8. The maximum loan size and investment limit exposure to single/group borrowers/issuers would be restricted to 15 percent of total capital funds.

9. Loans and advances of up to Rs 25 lakhs, primarily to micro enterprises, should constitute at least 50 percent of the loan portfolio.

10. For the first three years, 25 percent of branches should be in unbanked rural areas.

11. For the initial three years, prior approval will be required for branch expansion.

12. The small finance banks will be required to extend 75 percent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.

 

As of now, 10 Small finance banks started their banking operations which are as follows -  

1. Capital Small Finance Bank (India's first small finance bank) - Capital Small Finance Bank (formerly Capital Local Area Bank Ltd) is India's first small finance bank started its banking operations in April 2016 in Jalandhar, Punjab. The bank got the license of Small Finance Bank from Reserve Bank of India (RBI) in March 2016.

Sarvjit Singh Samra, Managing Director of Capital Small Finance Bank.

Headquarter of Capital Small Finance Bank – Jalandhar, Punjab.

Tagline - Vishwas Se Vikas Tak

2. Equitas Small Finance Bank (formerly Equitas Holdings P Limited) started its banking operations with 3 branches in Chennai in September 2016. The bank got the license of Small Finance Bank from Reserve Bank of India (RBI) in July 2016.

PN Vasudevan is the Managing Director & CEO of Equitas Small Finance Bank.

Headquarter of Equitas Small Finance Bank – Chennai, Tamil Nadu.

Tagline - Its Fun Banking 

3. Utkarsh Small Finance Bank (formerly Utkarsh Micro Finance) started its operations with five branches across Varanasi, Patna, Delhi-NCR, and Nagpur in January 2017. The bank got the license of Small Finance Bank from Reserve Bank of India (RBI) in November 2016.

Govind Singh is the Managing Director & CEO of Utkarsh Small Finance Bank.

Headquarter of Utkarsh Small Finance Bank – Varanasi, UP

Tagline - Apki Umeed Ka Khata

4. Suryoday Small Finance Bank (formerly Suryoday Micro Finance Ltd) started its banking operation in January 2017 in Belapur, Navi Mumbai. The bank got the license of Small Finance Bank from Reserve Bank of India (RBI) in November 2016.

Baskar Babu Ramachandran is the Managing Director & CEO of Suryoday Small Finance Bank.

Headquarter of Suryoday Small Finance Bank – Belapur, Navi Mumbai.

Tagline - A Bank of Smiles. 

5. Ujjivan Small Finance Bank (subsidiary of Ujjivan Financial Services Ltd) started its banking operations in February 2017 in Bengaluru, Karnataka. The bank got the license of Small Finance Bank from Reserve Bank of India (RBI) in November 2016.

Samit Ghosh is the Managing Director & CEO of Ujjivan Small Finance Bank.

Headquarter of Ujjivan Small Finance Bank – Koramangala, Bengaluru, Karnataka.

Tagline - Bharosa, Aap Ke Bharose Par

6. ESAF Small Finance Bank (formerly ESAF Microfinance and Investments Private Ltd.) started its banking operations in Thrissur, Kerala in March 2017. The bank got the license of Small Finance Bank from Reserve Bank of India (RBI) in November 2016.

K Paul Thomas is the Managing Director & CEO of ESAF Small Finance Bank.

Headquarter of ESAF Small Finance Bank – Thrissur, Kerala.

ESAF will be the first bank to be given a banking license in Kerala since independence.

Tagline - Joy of Banking

7. Au Small Finance Bank started its banking operation as a Small Finance Bank in April 2017. The bank got the license of Small Finance Bank from Reserve Bank of India (RBI) in December 2016.

Sanjay Agarwal is the Managing Director & CEO of Au Small Finance Bank.

Headquarter of Au Small Finance Bank – Jaipur, Rajasthan.

Tagline - Chalo Aage Badhe

8. Fincare Small Finance Bank (previously known as Disha Microfin Limited) started its banking operations in September 2017, with about 25 operational branches across Gujarat, Tamil Nadu, Karnataka and Andhra Pradesh. The bank got the license of Small Finance Bank from Reserve Bank of India (RBI) in May 2017.

Rajeev Yadav is the Managing Director & CEO of Fincare Small Finance Bank.

Headquarter of Fincare Small Finance Bank – Bengaluru, Karnataka.

Tagline - Banking on More.

9. North East Small Finance Bank Limited started its operations as a small finance bank in October 2017. The Rashtriya Gramin Vikas Nidhi Microfinance Limited-- North East (RGVNMFL-NE), the promoter of North East Small Finance Bank, got the license of Small Finance Bank from Reserve Bank of India (RBI) in March 2017.

Rupali Kalita is the Managing Director of North East Small Finance Bank.

Headquarter of North East Small Finance Bank – Guwahati, Assam.

Tagline -  Your Door Step Banker

10. Jana Small Finance Bank Limited started its operations as a small finance bank in March 2018. Janalakshmi Financial Services Private Limited, Bengaluru was one of the ten applicants which were issued in-principle approval for setting up a small finance bank, as announced in the on September, 2015.

Ajay Kanwal is the Chief Operating Officer of Jana Small Finance Bank.

Headquarter of Jana Small Finance Bank – Bengaluru

Tagline -  Paise Ke Kadar

 

Difference between Small & Finance Bank

Small Banks 

1. Small Finance Bank can accept deposits as well as can offer loan products

2. Small banks can accept fixed deposits (FDs), term deposits, recurring deposits (RDs) and any non-resident Indian deposits.

3. Small Finance Banks will provide banking services to small farmers, micro and small industries, the unorganized sector.

Payment Banks 

1. Payments Bank cannot lend money to the people.

2. Payments banks can’t accept fixed deposits (FDs), term deposits, recurring deposits (RDs) and any non-resident Indian deposits.

3. Payment Banks will provide banking services to migrant labor workforce, low-income households, small businesses, other unorganized sector entities and other users. 

4. Payments banks can open small savings accounts and accept deposits of up to Rs.1 lakh per individual.

5. Payments banks can issue debit cards but they are not eligible to provide credit card facilities.

6. Payments Banks are allowed to set up their own ATMs (automated teller machines).

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