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Regulatory Alert: RBI issues Guidelines for ‘on tap’ Licensing of Small Finance Banks in the Private Sector

09 December 2019

The Reserve Bank of India (‘RBI’) has issued final Guidelines[1] for ‘on tap’ Licensing of Small Finance Banks in the Private Sector on December 05, 2019. These guidelines have been issued pursuant to the erstwhile guidelines issued for licensing of Small Finance Banks (SFBs) in the private sector on November 27, 2014

The prior guidelines resulted in granting license to ten applicants that have since established banks. After gaining experience from a review of the performance of the existing SFBs, the RBI considered granting license to the SFBs throughout the year through ‘On Tap’ licensing. In this regard, the RBI released the draft guidelines for ‘On Tap’ licensing of SFBs which were published on September 13, 2019 and after considering the responses received from various stakeholder on such the same, the RBI issued the final notified guidelines, the key highlights of which are summarized below:

Key Highlights

  • Objective and Scope of Activities
    • The guidelines will enable the unserved sections of the society to have a savings vehicle and will also enable supply of credit to small business units, small and marginal farmers, micro and small industries and other unorganised sector entities. Preference will also be given to those applicants who plans to set up the bank in under-banked States/districts, such as in the North-East, East and Central regions of the country.
    • The SFB will be registered as a public limited company under the Companies Act 2013, licensed under the Banking Regulation Act, 1949 and will be governed by the provisions of the Banking Regulation Act, 1949, the Reserve Bank of India Act, 1934 and various relevant statutes and the directives, prudential regulations and other guidelines/instructions issued by the RBI and other regulators from time to time
    • The SFBs will be given a scheduled bank status immediately upon commencement of operations
    • Resident individuals/professionals who are Indian citizens having at least 10 years of experience in banking and finance at a senior level and companies & societies owned and controlled by residents and having successful track record of running their business for at least a period of 5 years
    • Existing Non-Banking Financial Companies (NBFCs), Micro Finance Institutions (MFIs), Local Area Banks (LABs), existing Payment Banks (PB) that are controlled by residents and having successful track record of running their business/ operations for at least a period of five years
    • Primary (urban) co-operative banks (‘UCBs’) with minimum net worth of INR 50 Crores and having capital to risk (weighted) assets ratio of > 9% shall also have the option for conversion into SFBs.
    • The eligible players will have to comply with all the legal and regulatory requirements of various authorities and conform to the guidelines
    • However, joint ventures by different promoter groups, government owned/ public sector entities and large industrial houses/ business groups[2] including NBFCs and PB promoted by them, alternative investment funds will not be permitted to make an application for setting up of SFBs. 
    • Minimum paid-up voting equity capital for the SFB is INR 200 Crores except:
      • In case of UCBs converting into SFB, their minimum net worth shall be INR 100 crores as on the date of commencement of business and it shall be increased to INR 200 crores within five years from the date of commencement of business
      • In case of existing NBFC/MFI/LAB/PB, minimum net worth is INR 200 crores or it should be achieved within eighteen months from the date of in-principle approval or as on the commencement of operations, whichever is earlier
    • SFB required to maintain minimum capital adequacy ratio of 15% of its risk weighted assets
    • Promoter shall hold minimum 40% of the paid-up voting equity capital at all times during the first 5 years from date of commencement of business. If it exceeds 40%, the same shall be brought down to 40% within next 5 years
    • Further, the promoters’ stake should be brought down to maximum of 30% of paid-up voting equity capital within 10 years and to a maximum of 15% within 15 years from date of commencement of business
    • In case of SFBs which are transited from UCBs, the promoters shall hold a minimum of 26% of paid up equity capital for the first five years from commencement of business and may be brought down to 15 per cent over a period of 15 years from the date of reaching net worth of INR 200 crores
    • Any proposed change of 10% or more of shareholding pattern in the promoting entity after the grant of license shall require prior approval of RBI
    • The thresholds for mandatory listing of shares within 3 years of reaching net worth of INR 500 crores and the option for voluntarily listing of SFBs is also permitted subject to fulfillment of the requirements of the capital market regulator.
    • As per the Banking Regulation Act, 1949 any shareholders’ voting rights in private sector banks are currently capped at 26% of the total voting rights of all the shareholders of the Banking Company. Further, any acquisition of 5% of more of paid-up share capital in a private sector bank or voting rights therein will require prior approval of RBI. Such provisions shall apply to SFBs also. However, the shareholding limits of the promoter/promoter group will be guided by promoters’ contribution as prescribed above
    • The promoters/promoter group can set up SFBs either as a stand-alone entity or under a holding company. If it is set up under the holding company, then such holding company must register itself as NBFC-CIC. If there is intermediate company between the SFB and its promoting entity, then such intermediate entity should be a Non-Operative Financial Holding Company (NOFHC).

Other highlights of 'On Tap' Guidelines 



Foreign shareholding

  • The foreign shareholding in SFB is permissible up to 74% as per current FDI policy for private sector banks

Prudential Norms

  • SFBs are required to put in place a robust risk management framework
  • SFBs will be subject to all prudential norms and regulations of the RBI as applicable to existing commercial banks
  • SFBs will be required to extend 75% of its Adjusted Net Bank Credit (ANBC) to sectors eligible for clarification as priority sector lending (PSL) by RBI.
  • The guidelines also provide for selling of PSL certificates, mechanism and criteria to assess the requirement of the maximum loan size and investment limit exposure of the banks

Additional conditions for conversion of NBFC/ MFI/ LAB/ PB

  • On conversion into an SFB, the NBFC/ MFI/ PB will cease to exist and all its business which a bank can undertake should fold into the bank and the activities that a bank cannot undertake should be divested/disposed off
  • The branches of NBFC/MFI/PB should either be converted into bank branches within a period of 3 years from the date of commencement of operations or should be merged/ closed. Additionally, in case of MFI the branches opened/ converted during the period of such 3 years, the MFI will have to open at least 25% banking outlets in unbanked rural centers in each year

Project Report

  • A project report should cover the business potential and viability of proposed bank, a business plan and financial inclusion plan
  • In contrast to the erstwhile guidelines, the notified Guidelines require a detailed submission of the additional information by the promoters in specified formats, as provided by the RBI

BDO Comments 

These guidelines would streamline and smoothen the application process for the eligible players looking to set up SFBs and will also aid eligible players to widen the suite of products they can provide, facilitate growth, ensure better corporate governance, sustain competition and raise capital. Aside from that, the scope of SFBs remains the same as that of erstwhile guidelines for undertaking basic banking activities of acceptance of deposits and lending to unserved sections, and if required undertake other non-risk sharing simple financial service activities with RBI approval.

[2] Large industrial house/ business groups with assets of INR 5000 crores or more with the non-financial business of the group accounting for 40% or more of the total assets/ gross income