DAILY NEWS ANALYSIS

GS-III : Economic Issues Banking

15 March, 2021
8 Min Read

Small Finance Banks

About Finance Banks:

They are niche banks that focus on and serve the needs of a certain demographic segment of the population.
The objectives of setting up of small finance banks will be to further financial inclusion by
- the provision of savings vehicles
- 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.
SFBs was recommended by the Nachiket Mor committee on financial inclusion.

Scope of activities of SFBs

Small finance banks 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.

Criteria for setting up SFBs

Individuals/professions with 10 years of experience in finance, Non-Banking Financial Companies (NBFCs), micro finance companies, local area banks are eligible to set up SFBs.
The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore.
The promoter’s minimum initial contribution to the paid-up equity capital shall at least be 40% and gradually brought down to 26% within 12 years from the date of commencement of business of the bank.
The small finance banks will be required to extend 75% of its Adjusted Net Bank Credit to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.
SFBs have to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as per RBI norms.
At least 50% of its loan portfolio should constitute loans and advances of up to Rs. 25 lakh.

What can Small Finance Banks do?

Sell forex to customers.
Sell mutual funds, insurance and pensions.
Can convert into a full-fledged bank.

What Small Finance Banks can’t do?

Extend large loans.
Cannot float subsidiaries
Deal in sophisticated products.

Source: TH

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