Small Finance Banks (SFBs)

Published: 3rd May, 2024

Context

The Reserve Bank of India (RBI) recently introduced new rules governing the conversion of Small Finance Banks (SFBs) into Universal Banks, signaling a significant shift in the banking landscape. The “Guidelines for 'on-tap' Licensing of SFBs in Private Sector” provide a transition path for SFBs to become universal banks.

Eligibility Conditions:

Under the new guidelines, only listed SFBs meeting specific eligibility criteria are eligible to apply for a universal banking license. These criteria include-
- minimum net worth of Rs 1,000 crore
- scheduled status
- satisfactory track record of at least five years
Gross non-performing assets (NPAs): Additionally, aspiring SFBs must demonstrate profitability, maintaining gross non-performing assets (NPAs) of less than 3% and net NPAs of less than 1% in the preceding two financial years.
Capital adequacy: They are also required to comply with prescribed capital adequacy norms and furnish a comprehensive rationale for their transition.

Fact Box:

About Small Finance Bank

The concept of SFBs was laid down by RaghuramRajan Committee.
Objective: To provide banking services to small and marginal enterprise farmers, low-income households, and other weaker sections of the society having limited access to basic banking services.
SFBs are operational under the regulation of the RBI in India, under the purview of the apex bank’s Banking Ombudsman Scheme, 2006, as amended from time to time.
Registered as: Public limited companies under the Companies Act, 2013
Governed by: Banking Regulations Act, 1949; RBI Act, 1934 and other relevant Statutes and Directives from time to time.
Services: Savings Accounts, Current Accounts, Fixed Deposits, Recurring Deposits, Loans, etc.

Comparison Parameter	Small Finance Bank	Commercial Bank
Target Customer	Underserved and unbanked segments of the population, like small businesses, MSMEs, and marginal farmers.	Wider consumer base including large corporates, SMEs, and retail customers.
Services Offered	Savings accounts, fixed deposits, recurring deposits, digital banking, debit cards, and so on.	Apart from basic banking services, a wide range of financial services are offered including credit cards, wealth management, corporate banking services, etc.
Minimum Capital Requirement	Rs 200 crores	Rs 500 crores
Loan Products	Microfinance loans, small personal loans, micro-business loans, and loans to marginal farmers and industries.	Large corporate loans, housing loans, personal loans, etc.

Other Terms:

Universal Banks are financial entities like commercial banks, financial institutions, NBFCs, etc. that undertake multiple financial transactions.
On-tap bank licensing facility, introduced in 2016, enables a window for making applications for bank licenses at the RBI throughout the year.

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Small Finance Banks (SFBs)

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