Small Finance Bank Licence

Reserve Bank of India (RBI) is regularly working with the objective of Financial Inclusion, in order to enlarge the reach of financial inclusion; one of the measures taken by RBI is to grant Small Finance Bank Licence.
Small Finance Bank Licence is granted for the purpose of financial inclusion of un-served and underserved section of Indian population, it also extend to grant credit facilities to farmers, micro and small industries and other lending to Priority sector.

A Small Finance bank must be registered as a public limited company under Companies Act 2013, thereafter it can seek application to grant licence to operate as a Small Finance Bank regulated by section 22 of the Banking Regulation Act 1949, The application shall be made to The office of Reserve Bank of India and RBI shall grant licence as per the guidelines contained in Reserve Bank of India Act, 1934. Post granting of licence to operate as Small Finance Bank, the bank shall adhere to the compliance contained in Foreign Exchange Management Act 1999, Credit Information Companies (Regulation) Act 2005, Payment and Settlement Systems Act 2007, Deposit Insurance and Credit guarantee corporation Act 1961 and several other enactments as per the applicability depend upon the transaction undertaken, nature, size and shape of such Small Finance Bank.

In order to get Small Finance Bank Licence, there must be minimum paid up equity share capital of INR 200 crores, the small finance bank shall increase the capital in order to maintain minimum capital adequacy ratio of 15% of its risk weighted assets, but at any time its paid up equity share capital shall not fall below minimum prescribed limit of INR 200 crores. Initially the promoters of such small finance bank should contribute a minimum of 40% of total capital requirement, in case if promoter contribution is in excess of 40% then such percentage shall be brought down to 40% within first 5 years, gradually thereafter the promoter contribution shall reduce with the lapse of time and increase in business. Post crossing the limit of net worth of INR 500 crore, such small finance bank need to mandatorily listed on any recognized stock exchange. Foreign Direct Investment (FDI) in banking sector is permitted up to 49% under automatic route and further up to 74% under approval route. Thus, a small finance bank can consider the FDI investment subject to the prescribed limits.

Certain measures need to be undertaken while seeking Small Finance Bank Licence:

1. The bank can be promoted by individuals, corporate, trust or societies

2. The banking operations shall not be restricted to any region and can be spread geographically.

3. The bank shall lend atleast 75% of its total lending to Priority sector lending, and 50% of its lending transaction must be below INR 25 lakhs.

4. The promoters should be of sound mind and having atleast 10 years experience in banking and finance sector.

5. Existing NBFC (Non Bank Finance Companies), MFI (Micro Finance Institutions) can also seek for licence for Small Finance Bank.

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