After the review of the performance of the existing Small Finance Banks (SFBs) and gaining experience therefrom, the Reserve Bank of India (‘RBI’) has recently come up with the draft guidelines for ‘on tap’ licensing of SFBs on September 13, 2019, with a view to encouraging competition.
With this ‘on tap’ facility, the RBI will now accept applications and grant licenses for SFBs throughout the year, in contrast to the erstwhile guidelines issued on November 27, 2014, where the application window was open until 16 January 2015. The preference will also be given to those applicants who plan to set up the bank in under-banked states/districts, such as in the North-East, East and Central regions of the country.
In comparison to the erstwhile guidelines, the draft guidelines now specify the eligibility criteria for setting up of SFBs by resident individuals/professionals who are Indian citizens, having at least ten years of experience in banking and finance at a senior level and companies and societies owned and controlled by residents with a successful track record of running their business for at least a period of five years.
Besides the existing Non-Banking Financial Companies (NBFCs), Micro Finance Institutions (MFIs) and Local Area Banks (LABs) that are controlled by residents and having a successful track record of at least five years, payment banks and primary (Urban) Co-operative banks (‘UCBs’) can also opt for conversion into SFBs.
As the intention is to serve smaller customers, proposals from public sector entities and large industrial houses/ business groups as defined therein will not be considered.
Capital requirement and Promoter’s contribution
It is now proposed that the minimum paid-up equity capital of an SFB should be Rs 200 crores as compared to Rs 100 crores earlier. Further, the promoters are required to hold at least 40 per cent of the paid-up voting equity capital for 5 years and thereafter bring down their holding to 40/30/15 per cent over the period of 5/10 and 15 years respectively.
It is also now clarified that promoters/a promoter group can set up an SFB either as a standalone entity or under a holding company. If it is set up under the holding company, then such a holding company must register itself as an NBFC-CIC. Further, if there is an intermediate company between the SFB and its promoting entity, then such an intermediate entity should be is a Non-Operative Financial Holding Company (NOFHC).
While there are other provisions such as listing of SFBs, prudential norms, additional conditions for existing NBFCs/MFIs/LABs converting into a bank, business plan requirement, corporate governance etc. similar to the erstwhile guidelines, the new guidelines, once in effect, will definitely streamline and smoothen the application process for the eligible players looking to set up SFBs.
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