RBI Committee to Study Applications for Universal Banks & Small Finance Banks

The Reserve Bank of India (RBI) has announced the creation of a Standing External Advisory Committee under the chairmanship of Shyamala Gopinath for evaluating applications for Universal Banks and Small Finance Banks.

This is part of the central bank’s earlier announced plan to give banking permits on a continuous basis to candidates, a process that is commonly known as ‘on-tap’ licensing.

About On tap licensing:

• It means the RBI window for granting banking licences will be open throughout the year.

What is Universal banking?

• It is a system of banking where banks undertake a blanket of financial services like investment banking, commercial banking, development banking, insurance and other financial services including functions of merchant banking, mutual funds, factoring, housing finance, insurance etc.

RBI universal bank licensing guidelines:

• Individuals/professionals who are ‘residents’ and have minimum of 10 years of experience in banking and finance at a senior level.
• The initial minimum paid-up voting equity capital for a bank shall be Rs. 5000 Cr.
• The bank shall get its shares listed on the stock exchanges within 6 years of the commencement of business by the bank.
• The bank is precluded from having any exposure to its promoters, major shareholders who have a shareholding of 10 per cent or more of paid-up equity shares in the bank, the relatives of the promoters as also the entities in which they have significant influence or control.
• The bank has to open at least 25 per cent of its branches in unbanked rural centres. (PT)
• The bank shall comply with the priority sector lending targets and sub-targets as applicable to the existing domestic scheduled commercial banks.
• The board of the bank should have a majority of independent directors.

Small Finance Banks (SFBs)

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

Scope of activities of SFBs

• The small finance banks 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 be no restriction in the area of operations of small finance banks.

Criteria for setting up SFBs

• Individuals/professionals with 10 years of experience in finance, Non-Banking Financial Companies (NBFCs), microfinance companies, and 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 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.
• The small finance banks will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) 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 per cent 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 do Small Finance Banks can’t do?

• Extend large loans.
• Cannot float subsidiaries and deal in sophisticated products