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prelims Test Series 2019
RBI Grants Licences to 10 Small Finance Banks
Sep 21, 2015

The Reserve Bank of India (RBI) shortlisted 10 micro lenders to set up small finance banks to advance loans primarily to the unbanked, small businesses and farmers, micro and small industries and unorganized sector entities which do not have access to finance from the larger banks. RBI's decision to grant licences to only 10 players would have resulted in a lot of disappointment as there were as many as 72 applicants, including a host of professionals and finance companies.

Salient Features

  • Of the 10 entities granted in-principle approval to transform into banks, eight are microfinance providers, one a local area bank and one a non-banking finance company.

  • Small finance banks are similar to regular commercial banks except that their services will be much smaller.

  • These new type of banks should generate at least 75% of their business from the priority sector (largely agriculture) and mainly from areas where large banks are not present.

  • Besides, 50% of their loans should be of ticket sizes under Rs 25 lakh.

  • Like payments banks, the minimum paid-up equity for small finance banks is also fixed at Rs 100 crore.

  • Promoters' initial contribution should be at least 40%, which could be brought down to 26% over the next 12 years.

  • One common thread running across the list of the 10 successful applicants of small banks is that all of them have managed to extend credit to small borrowers which no bank has been able to reach.

  • The detailed scrutiny involved assessment of financial soundness, proposed business plan, fit and proper status based on due diligence reports received from the regulators, investigative agencies, banks, etc.

  • According to RBI's mandate for these entities, they have to be operational as a bank in the next 18 months.

  • RBI rules stipulate that small finance banks will primarily undertake basic banking activities like accepting deposits and lend to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities.

  • At least 50% of loan portfolio of these banks should constitute loans and advances of up to Rs 25 lakh. However, there are no restrictions relating to areas of operation for these banks.

Licences for payments banks, which were issued recently on the other hand, are those specialized small banks which can only receive deposits and offer remittance services, but cannot give loans. The payments banks are also not allowed to hold a balance of more than Rs 1 lakh per customer in their bank accounts. 

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