BI announces new policy for small finance banks with higher capital requirement

The Reserve Bank of India (RBI) has announced a new policy for licensing of small finance banks (SFBs) in the private sector on an ‘on tap’ basis. The policy aims to expand the banking services to the unserved and underserved sections of the society through high technology-low cost operations.

Key changes in the policy

  • The minimum paid-up voting equity capital for setting up an SFB has been increased from Rs 100 crore to Rs 200 crore, except for urban co-operative banks (UCBs) that wish to convert into SFBs.
  • The promoters of the SFBs will have to hold a minimum of 40 per cent of the paid-up voting equity capital of the bank, which will remain locked in for five years from the date of commencement of business. The promoters will also have to bring down their shareholding to 30 per cent within 10 years and to 15 per cent within 15 years.
  • The foreign shareholding in the SFBs will be as per the existing foreign direct investment (FDI) policy for private sector banks. As per the current policy, FDI up to 74 per cent is allowed in private banks, subject to certain conditions.
  • The SFBs will also have to list their shares on the stock exchanges within three years of reaching a net worth of Rs 500 crore. The RBI said that SFBs having net worth below Rs 500 crore could also list their shares voluntarily, subject to fulfilment of the requirements of the Securities and Exchange Board of India (SEBI).
  • The existing non-banking financial companies (NBFCs), microfinance institutions (MFIs) and local area banks (LABs) in the private sector, which are controlled by residents, can opt for conversion into SFBs. However, proposals from public sector entities and large industrial house/business groups will not be entertained.
  • The SFBs will have to maintain a minimum capital adequacy ratio of 15 per cent of their risk weighted assets (RWA) on a continuous basis. They will also have to ensure that at least 75 per cent of their adjusted net bank credit is advanced to priority sector lending. Furthermore, at least 50 per cent of their loan portfolio should comprise loans of up to Rs 25 lakh.

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