Context

Recently, the Reserve Bank of India (RBI) has turned down the request from small finance banks (SFB) to drop the “small finance” tag from their name.

• The Reserve Bank of India (RBI) has turned down the request from small finance banks (SFB) to drop the “small finance” tag from their name, saying that SFBs are differentiated banks with specific objectives like financial inclusion.

About Small Finance Banks (SFBs)

• Background: Dr. Raghuram Rajan’s Committee on Financial Sector Reforms recommended the notion of Small Finance Banks in its 2009 report titled ‘A Hundred Small Steps’.
• Small Finance Banks (SFBs) are specialized banks in India that focus on the financial needs of underserved and unserved population segments, such as small business units, micro and small businesses, and unorganized sector entities. 

Objectives of Small Finance Banks (SFBs)

• Financial Inclusion: SFBs seek to promote financial inclusion by meeting the needs of small businesses, small and marginal farmers, micro and small enterprises, and unorganized sectors.
• Not Exclusive: Although its primary focus is financial inclusion, SFBs are open to more than just these sectors.

Promoters and Structure of SFBs

• Promoters of Small Finance Banks: Individuals, corporations, trusts, or societies can promote small finance banks.
• Legal Structure: They are formed as public limited companies in the private sector, licenced under the Banking Regulation Act of 1949, and supervised by the RBI Act of 1934.

Area of Operations of SFBs

• No Restrictions: Unlike regional rural banks (RRBs) and local area banks, SFBs can operate without restriction in terms of location.
• Capital Requirement: The minimum capital requirement for SFBs is 100 crores.

Regulatory Framework For SFBs

• Compliance: SFBs are subject to all RBI prudential rules and regulations that apply to existing commercial banks, including maintaining the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio.
• Priority Sector Lending (PSL): SFBs must extend 75% of the credit to sectors classified as priority sector lending by the Reserve Bank.

SFBs: Branches and Rural Presence 

• Branches: At least 25% of SFB branches should be in unbanked rural areas.
• Loan Portfolio: A minimum of 50% of the loan portfolio should consist of loans and advances of up to 25 lakhs.

Non-Risk Sharing Financial Services

• Allowed operations: SFBs may engage in non-risk-sharing financial services operations that do not involve a commitment of funds. These include distributing mutual fund units, insurance policies, pension plans, etc.
• Foreign Exchange:  SFBs can establish dealerships in the foreign exchange market.

Conversion and Licensing

• Conversion: Existing NBFCs, microfinance institutions, and local banks can choose to convert into Small Finance Banks.
• On-Tap Licencing: In 2019, the RBI implemented a ‘on-tap’ licensing process, which allows it to accept applications and award licenses to SFBs throughout the year.