Small Finance Banks in India

Why in news?

• The Reserve Bank of India (RBI) said it has received applications from two more entities — Cosmea Financial Holdings Private Ltd. and Tally Solutions Private Ltd. — seeking licences to operate Small Finance Banks (SFBs).
• This is as per RBI’s guidelines for ‘on tap’ licensing of small finance banks in the private sector.
• With this, a total of six entities have applied for the licence.
• The other four applicants who were named in April 2021 are VSoft Technologies Private Ltd., Calicut City Service Co-operative Bank Ltd., Akhil Kumar Gupta, and Dvara Kshetriya Gramin Financial Services Private Ltd.

Local Area Banks: An experiment with Small Banks

• In India, where extending banking services to the underserved and unserved sections of the population is a challenge, there is merit in considering access to bank credit and services through the expansion of small banks in unbanked and under-banked regions.
• In India, an experiment with small banks was taken up following an announcement made by the then Finance Minister in the Union Budget in August 1996 and the RBI issued guidelines for setting up of Local Area Banks (LABs) vide its Press Release dated August 24, 1996.
• The LABs were conceived as low-cost structures which would provide efficient and competitive financial intermediation services in a limited area of operation, i.e., primarily in rural and semi-urban areas.
• LABs were required to have a minimum capital of Rs. 5 crores and an area of operation comprising three contiguous districts. Presently, four LABs are functioning satisfactorily.
• Taking into account the above and that small finance banks can play an important role in the supply of credit to micro and small enterprises, agriculture and banking services in unbanked and under-banked regions in the country, the RBI has decided to licence new “small finance banks” in the private sector.
• While permitting small banks, however, the issues relating to their size, capital requirements, area of operations, exposure norms, regulatory prescriptions, corporate governance and resolution need to be suitably addressed in the light of experience gained.

Hence RBI has come out with the following guidelines for licensing small finance banks in the private sector.

Objectives

• The objectives of setting up of small finance banks will be to further financial inclusion by provision of savings vehicles, and
• supply of credit to small business units, small and marginal farmers, micro and small industries and other unorganised sector entities, through high technology-low cost operations.

Eligible promoters

• Resident individuals/professionals with 10 years of experience in banking and finance;
• Companies and societies owned and controlled by residents will be eligible to set up small finance banks.
• Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents can also opt for conversion into small finance banks.
• Promoter/promoter groups should be ‘fit and proper with a sound track record of professional experience or of running their businesses for at least a period of five years in order to be eligible to promote small finance banks.

Scope of activities

• The small finance bank shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
• There will not be any restrictions in the area of operations of small finance banks.

Capital requirement

• The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore.

Promoter's contribution

• The promoter's minimum initial contribution to the paid-up equity capital of such a small finance bank shall at least be 40 per cent and gradually brought down to 26 per cent within 12 years from the date of commencement of business of the bank.

Foreign shareholding

• The foreign shareholding in the small finance bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.

Prudential norms

• The small finance bank will be subject to all prudential norms and regulations of RBI as applicable to existing commercial banks including requirement of maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). No forbearance would be provided for complying with the statutory provisions.
• The small finance banks will be required to extend 75 per cent of their Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.
• At least 50 per cent of its loan portfolio should constitute loans and advances of up to Rs. 25 lakh.

Procedure for RBI decisions

• An External Advisory Committee (EAC) comprising eminent professionals like bankers, chartered accountants, finance professionals, etc., will evaluate the applications.
• The decision to issue an in-principle approval for setting up of a bank will be taken by the Reserve Bank. The Reserve Bank’s decision in this regard will be final.
• The validity of the in-principle approval issued by the Reserve Bank will be eighteen months.
• The names of applicants for bank licences will be placed on the Reserve Bank’s website.

Operational SFBs in India

Some of the operational Small Finance Banks in India are as follows.

• Ujjivan Small Finance Bank.
• Janalakshmi Small Finance Bank.
• Equitas Small Finance Bank.
• A U Small Finance Bank.
• Capital Small Finance Bank.
• ESAF Small Finance Bank.
• Utkarsh Small Finance Bank.
• Suryoday Small Finance Bank.
• Fincare Small Finance Bank.

Subsidence of the Joshimath Land (Uttarakhand)

• Ground subsidence caused breaches in more than 560 homes and prompted alarmed villagers to complain, as a result, the Uttarakhand government has prohibited development work in and around Joshimath.
• Joshimath, a vital hub for travelers heading to Badrinath and Hemkund Sahib, suffered fissures as a result of soil subsidence, which alarmed the locals and led to demonstrations.
• Over 60 residents who were living in untenable homes in the sinking town of Joshimath were moved to temporary relief centers after the town was declared a landslide-subsidence zone.

In what region is Joshimath?

• Many Himalayan Mountain climbing trips, as well as pilgrimages to Badrinath and Hemkund Sahib, begin in Joshimath.
• One of Adi Shankara's four cardinal monasteries is located there.
• In Uttarakhand's Chamoli district, on the Rishikesh-Badrinath National Highway (NH-7), is the steep town of Joshimath.
• Runnin' streams with a high gradient from Vishnuprayag, a confluence of the Dhauliganga and the Alaknanda rivers, through the town (fall in high-risk seismic Zone-V).
• Joshimath's first occurrence of subsidence was observed in 1976, and the town is situated on the site of historic landslides, according to the Mishra Commission study from 1976.
• Heavy layer of overburdened material covering
• Due to loose soil from seepage from streams uphill and scattered, highly weathered gneissic rocks with a limited bearing capacity, the town area is very vulnerable to sinking and prone to landslides.

What Causes Joshimath to Sink?

Weather catastrophes:

• Extreme erosion caused by the floods in June 2013 and February 2021 (the flooding of the Rishi Ganga) had a negative effect on the landslide zone.
• The most recent satellite data show that mountain streams have altered their paths and widened their channels, adding to the fragility of the belt's slopes.
• The first reports of cracks in walls and structures were made in 2021 as the Chamoli area of Uttarakhand frequently faced landslides and flooding.
• According to reports, a 2022 expert panel appointed by the Uttarakhand government discovered that Joshimath is "sinking" in some places as a result of both man-made and natural reasons.

Reasons for sinking:

Geology:

• Joshimath, which is located in Zone V of the seismic zone map, has seen a number of earthquakes with Richter magnitudes under 5, according to the Uttarakhand State Disaster Management Authority (USDMA).
• Joshimath is extremely prone to sinking due to tectonic activity because it is located on a fault line.

Unanticipated construction

• Using large machinery, the Border Roads Organization (BRO) is constructing the Helang bypass, which will cut the journey to the Badrinath shrine by around 30 kilometres.
• Around Joshimath the Tapovan, hydroelectric (HE) projects, including the Vishnugad HE Project, have been approved. A tunnel boring machine (TBM) was used to excavate the project's tunnel.
• Land Erosion: Other factors contributing to the fate of the city include sliding along natural streams and rushing streams from Vishnuprayag.
• Impact: 561 homes have reported cracks, and at least 66 families have left the area. According to a government official, more than 3000 people have been impacted thus far.

Preventive measures:

• Relocating residents to a more secure area is a preventative strategy.
• Experts advise that the entire hydroelectric and development pipeline in the area be shut down.
• In order to account for the new variables and shifting geographical features, the town's planning needs to be revised.
• Planning for drainage and sewer systems is among the most crucial aspects that have to be researched and improved.
• Replanting has also been advocated by experts as a way to preserve soil capacity in the area, particularly in sensitive locations.
• To save Joshimath, a coordinated effort between the government and civil organizations is required, assisted by military groups like the Border Roads Organisation (BRO).
• The state currently has weather prediction technology that can alert citizens to local events, but its coverage has to be expanded.

What is Land Subsidence?

• An abrupt or progressive sinking of the Earth's surface is referred to as land subsidence.
• The most common causes of subsidence, or the sinking of the ground as a result of underground material movement, are pumping, fracking, or mining operations that extract water, oil, natural gas, or mineral resources from the earth.
• Natural occurrences such as earthquakes, soil compaction, glacial isostatic adjustment, erosion, the creation of sinkholes, and the addition of water to fine soils deposited by wind can also result in subsidence (a natural process known as loess deposits).

What is Landslide?

• The sliding down of a slope of a mass of rock, rubble, or earth is known as a landslide.
• They fall under the category of mass wasting, which is any downward movement of rock and soil caused directly by gravity.
• The five slope movement types of falls, topples, slides, spreads, and flows are all included under the umbrella word "landslide."

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