With a need of financial inclusion in the country, RBI and central government has taken many
steps at different times. Taking a further step, RBI gave differentiated licenses for specific
activities to new set of banks(niche/differentiated banks) named Payment Banks and Small Banks.
With their coming, customers will have a variety of choices.

What is a Small Finance Bank?

Small Banks are physical banks whose aim is to provide basic banking products such as deposits
and supply of credit, but  in a limited area of operation. Small banks are expected to meet credit
and remittance needs of small businesses, farmers, micro and small industries, unorganised
sector ,low income households and migrant work force through high technology-low cost
operations.

Important features of Small Banks:

They can accept any deposit (savings, current, fixed deposits, recurring deposits) like
commercial banks.
Unlike payment banks, small finance banks will be allowed to lend money also.
For the initial 3 years, prior approval will be required for branch expansion.
To give the feel of local bank, their area of operation will be restricted.
NBFC’s , any individual with 10 years of experience in banking can apply for licenses.
Their target are small businesses and MSMEs.
They are not allowed to lend the deposited money to big businesses or industries.

Some of the conditions for setting up Small Bank:

Minimum paid-up equity capital requirement of Rs 100 crore.
Every small finance bank must have the words “small finance bank” in its name.
They cannot set up subsidiaries to undertake non-banking financial service activities.
75% of its Adjusted Net Bank Credit (ANBC) should be advanced to the priority sector as
categorized by RBI.
Maximum loan size to a single person cannot exceed 10% of total capital funds; cannot
exceed 15% in the case of a group.
At least 50% of its loans should constitute loans and advances of up to 25 lakh.
Small banks can undertake financial services like distribution of mutual fund units, insurance
products, pension products, and so on, but not without prior approval from the RBI.
A small bank can transform into a full-fledged bank, but only after RBI’s approval.
A fundamental requirement is that it must have 25% of its branches set up in unbanked
areas.

summary of regulations:

• Existing non-banking financial companies (NBFC), micro-finance institutions (MFI) and local area banks (LAB) can apply to become small finance banks.
• They were set up with the twin objectives of providing an institutional mechanism for promoting rural and semi urban savings and for providing credit for viable economic activities in the local areas.
• They are established as public limited companies in the private sector under the Indian companies act 1956.
• They can be promoted either by individuals, corporate, trusts or societies.
• They are governed by the provisions of Reserve Bank of India act 1934, Banking Regulation act 1949 and other relevant statutes.
• The promoters should have 10 years experience in banking and finance. The promoters stake in the paid-up equity capital will be at least 40% initially but must be brought down to 26% in 12 years. Joint ventures are not permitted. Foreign share holding will be allowed in these banks as per the rules for FDI in private banks in India.
• The banks will not be restricted to any region.

# ARCHANA