InvestorQ : What are the rules and regulations that small finance banks have to follow?
nishi Shah made post

What are the rules and regulations that small finance banks have to follow?

Answer
user profile image
Nitin Shah answered.
1 year ago


Small finance bank is a type of bank that operates in India, the other one being universal or the regular banks we know (such as State Bank of India, ICICI Bank, HDFC Bank, etc). The Reserve Bank of India grants two types of licenses to banks: the Universal Bank License and the Differentiated bank License.

Small finance bank is a differentiated or niche bank that provides banking services to a particular section or demographic of the society.

According to the Reserve Bank of India, the objectives of a small finance bank are to further financial inclusion by providing savings vehicle as well as credit supply to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, through high technology-low cost operations.

While small finance banks are similar to commercial banks as both of them provide saving as well as lending facilities, small banks have to follow stricter regulations as proposed by RBI.

A few rules that small finance banks have to follow are:

- Every small finance bank must have the words -- small finance bank -- in its name.

- Small finance banks cannot set up subsidiaries to undertake non-banking financial service activities.

- 75% of a small finance bank’s Adjusted Net Bank Credit (ANBC) should be advanced to the priority sector as categorized by RBI.

- A small finance bank’s maximum loan size to a single person cannot exceed 10% of its total capital funds

- A small finance bank’s maximum loan size cannot exceed 15% in the case of a group.

- At least 50% of a small finance bank’s loans should constitute loans and advances of up to 25 lakh.

- Small finance banks can undertake financial services like distribution of mutual fund units, insurance products, pension products, and so on. However, this can only be done after receiving prior approval from the RBI.

- Small finance banks will be subject to all prudential norms and regulations of the RBI as applicable to existing commercial banks. This will include maintaining cash reserve ratio (CRR) or the percentage of deposits that must be kept aside as a reserve; and statutory liquid ratio (SLR) or the percentage of deposits that must be invested in government securities.

- Minimum paid-up equity capital requirement of Rs 100 crore.

- The promoter's minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40% which can be gradually brought down to 26% within 12 years from the date of commencement of operations.

- A small bank can transform into a full-fledged bank, but only after RBI's approval.