Small Finance Bank (SFB) The fundamental goals behind the establishment of Small Finance Banks (SFB) are twofold: first, small finance bank, ujjivan small finance bank, au small finance bank, equitas small finance bank, unity small finance bank to encourage financial inclusion by offering savings options, and second, to provide credit to various segments such as small business units, small and marginal farmers, micro and small industries, and other entities within the unorganized sector. These objectives are pursued through the implementation of high-tech, cost-effective operations.
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Small Finance Bank (SFB)
Small Finance Banks (SFBs) can be established by resident individuals or professionals with at least 10 years of experience in banking and finance. Companies and societies owned and controlled by residents, existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) owned and controlled by residents can also convert themselves into SFBs. Promoter or promoter groups with a successful five-year record of professional experience or running their businesses are eligible to promote small finance banks.
SFBs have a broad scope of activities, including accepting deposits and lending to unserved and underserved sections, such as small business units, small and marginal farmers, micro and small industries, and unorganized sector entities. There are no restrictions on the area of operations for small finance banks.
The minimum paid-up equity capital for SFBs should be Rs. 200 crore, with the promoter’s initial contribution being at least 40% of the paid-up equity capital, gradually reducing to 26% within 12 years. Foreign shareholding is allowed as per the Foreign Direct Investment (FDI) policy for private sector banks. SFBs are subject to prudential norms applicable to existing commercial banks, including Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
SFBs are required to extend 75% of their Adjusted Net Bank Credit (ANBC) to sectors eligible for priority sector lending (PSL) classification by the Reserve Bank. At least 50% of the loan portfolio should consist of loans and advances up to Rs. 25 lakh. If an SFB wishes to convert into a universal bank, it must fulfill minimum paid-up capital/net worth requirements applicable to universal banks, demonstrate its track record of performance as an SFB, and undergo RBI’s due diligence exercise.
For granting licenses, an External Advisory Committee (EAC) comprising eminent professionals evaluates applications. Based on the evaluation, RBI issues an in-principle approval for setting up an SFB or otherwise. The RBI’s decision is final, and the in-principle approval is valid for eighteen months. small finance bank, ujjivan small finance bank, au small finance bank, equitas small finance bank, unity small finance bank
Payment Banks (‘PB’)
Payment banks were established with the goal of enhancing financial inclusion by providing small savings accounts and payment/remittance services to migrant laborers, low-income households, small businesses, other unorganized sector entities, and various users. Payment Banks can be promoted by existing non-bank Pre-paid Payment Instrument (PPI) issuers, individuals/professionals, NBFCs, Corporate Business Correspondents (BCs), mobile telephone companies, super-market chains, companies, real sector cooperatives owned and controlled by residents, and public sector entities. Promoters/promoter groups may enter into joint ventures with existing scheduled commercial banks to establish payment banks, and scheduled commercial banks can take equity stakes as permitted under Section 19(2) of the Banking Regulation Act.
Promoters/promoter groups must be ‘fit and proper,’ demonstrating a sound track record of professional experience or running businesses for at least five years to be eligible to promote payment banks. Payment Banks can accept demand deposits, initially restricted to holding a maximum balance of Rs. 100,000 per individual customer. They are permitted to issue ATM/debit cards (but not credit cards), offer payment and remittance services through various channels, function as Business Correspondents of another bank per RBI guidelines, and distribute non-risk sharing products like mutual fund units and insurance products.
Payment Banks cannot engage in lending activities. In addition to maintaining Cash Reserve Ratio (CRR) with the RBI, a Payment Bank is required to invest a minimum of 75% of its demand deposit balances in Statutory Liquidity Ratio (SLR) securities with a maturity of up to one year. They can hold a maximum of 25% in current and time/fixed deposits with other scheduled commercial banks for operational and liquidity management. small finance bank, ujjivan small finance bank, au small finance bank, equitas small finance bank, unity small finance bank
A Payment Bank should have a minimum paid-up equity capital of Rs. 200 crore, with a leverage ratio not less than 3%, meaning its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves). The minimum initial contribution from the promoter will be 40% of the paid-up equity capital of the Payment Bank for the first five years from the commencement of its business. Foreign shareholding is allowed, subject to prevailing FDI policy applicable to private sector banks. Small Finance Bank
From the outset, a Payment Bank should be fully networked and technology-driven, adhering to generally accepted standards and norms. It should also have a high-powered Customer Grievances Cell to handle customer complaints. The procedure for granting a license and its validity is similar to that of Small Finance Bank. small finance bank, ujjivan small finance bank, au small finance bank, equitas small finance bank, unity small finance bank
Difference Between Payment Banks and Small Finance Banks
| Payment Banks | Small Finance Banks |
|---|---|
| Payment Banks (PBs) received deposits and remittances but cannot lend. | Small Finance Banks (SFBs) will lend to unserved and underserved sections, including small business units, micro, and small industries, and small and marginal farmers. |
| Deposits from a customer should not exceed Rs. 1 Lakhs. | It can provide basic services of accepting deposits and lending. |
| Cannot give loans and cannot issue credit cards but can issue ATM/Debit Card. | No restriction on the area of operation. |
| Can distribute non-risk financial products such as Mutual Funds and Insurance Products. | The loan portfolio to the extent of 50% or more should constitute loans and advances of up to Rs. 25 Lakhs. |
Small Finance Bank (SFB) FAQ
The primary objectives of setting up Small Finance Banks are to promote financial inclusion through the provision of savings vehicles and the supply of credit to small business units, small and marginal farmers, micro and small industries, and other unorganized sector entities, using high technology-low-cost operations.
Small Finance Banks can be promoted by resident individuals/professionals with a minimum of 10 years of experience in banking and finance. Additionally, companies and societies owned and controlled by residents, existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) owned and controlled by residents are also permitted to convert themselves into SFBs.
SFBs have a broad scope of activities, including the acceptance of deposits and lending to unserved and underserved sections, such as small business units, small and marginal farmers, micro and small industries, and unorganized sector entities. There are no restrictions on the area of operations for Small Finance Banks.
The minimum paid-up equity capital for Small Finance Banks should be Rs. 200 crore. The promoter’s minimum initial contribution has to be at least 40% of the paid-up equity capital and gradually brought down to 26% within 12 years from the date of commencement of the bank’s business.
Foreign shareholding is allowed and is subject to the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.
