Indian Law Updates December 2019| Banking Practice

RBI releases guidelines for ‘on-tap’ licensing of small finance banks

Introduction

The Reserve Bank of India (RBI) had authorized the setting up small finance banks (SFBs) by way of a circular dated November 27, 2014. On 5th December 2019, the RBI issued revised guidelines for licensing of SFBs “on-tap”. Licenses are available ‘On tap’, thus allowing eligible applicants to apply for a license at any point of time during a year.

scope

SFBs may undertake basic banking activities such as:

  1. Deposit taking.
  2. Lending to small and micro industries and business units, small and marginal farmers and other unorganized sector entities.
  3. Activities not requiring commitment of own funds such as distribution of mutual fund units, insurance products, pension products subject to obtaining the prior approval of RBI and relevant sectoral regulator. The aforementioned restriction shall fall away after three (3) years of commencement of its banking operations.
  4. Category II Authorised Dealer (AD) for foreign exchange for their clients.

Eligibility criteria for setting up a small finance bank:

  1. A new SFB may be set up by:
    1. a) Resident Indian professionals having 10 years experience in banking and finance.
    2. b) Resident owned and controlled private companies and societies.
  1. SFBs have to be registered as a public company under the Companies Act, 2013.
    1. SFBs may be set up as a standalone entity or under a holding company which is registered as an NBFC – Coren Investment Company (CIC). Alternatively, there may be an intermediate entity between the holding company and SFB which will be a Non-Operative Financial Holding Company (NOFHC). However, the SFB itself cannot set up any subsidiaries.
  2. Following entities may convert to SFBs under the on-tap circular:
    1. a) Resident owned NBFCs, Micro Finance Institutions (MFIs) and Local Area Banks (LABs).
    2. b) Resident controlled payment banks which have completed five years of operations.
    3. c) Primary urban co-operative banks (UCBs) which choose to convert to SFBs under the Scheme for Voluntary Transition (offered by RBI through a circular in 2018).
    4. Since SFBs are intended to serve smaller customers, public sector entities and large industrial houses or alternative investment funds are not eligible to become SFBs. Large industrial houses / business groups have been defined to mean groups with assets of INR 50 Billion or more with 40% or more non financial business. RBI has discretion to determine whether or not applicants are considered ‘large industrial houses’.
  3. The minimum capital requirement is:
    1. a) INR 2 Billion for new SFBs.
    2. b) INR 1 Billion for – UCBs transitioning to become (to be increased to INR 2 Billion within 5 years of such commencement).
    3. An NBFC/MFI/LAB/PB which applies for conversion to SFB is required to have minimum net worth of, or infuse capital to achieve a minimum net worth of INR 2 Billion within 18 months of in-principle approval or commencement of operations, whichever is earlier.
  4. Promoter / promoter groups and Directors of SFBs must meet the ‘fit and proper’ criteria in terms of past track record of integrity, financial soundness and professional experience for a period of five years. The Board should have majority of independent directors.
  5. Promoters shall keep their other financial and non financial services ‘distinctly ring fenced’ and thus it is recommended that business of the SFB is kept stand-alone. Promoters cannot be granted licenses for both universal bank and SFBs.
  6. Foreign shareholding shall be permitted as under the extant FDI policy applicable to banks.
  7. Applicants are required to submit a business plan reflecting how the objectives of SFBs will be achieved and how existing business will fold into the bank’s business.
  8. Operations of the SFBs have to be technology driven from the beginning and a technology plan should be furnished to RBI.

Applications should be submitted to the Chief General Manager, Department of Regulation at Mumbai.

Process for approval for new applications

The “in-principle approval” as granted by the RBI vide the circular shall be valid for a period of eighteen (18) months from the date of grant of such approval. Therefore, the applicant company shall ensure that it obtains a full license prior to the lapse of these eighteen (18) months.

Salient differences from the 2014 circular:

The “in-principle approval” as granted by the RBI vide the circular shall be valid for a period of eighteen (18) months from the date of grant of such approval. Therefore, the applicant company shall ensure thatit obtains a full license prior to the lapse of these eighteen (18) months.

2019 guidelines

Minimum capital for new SFBs: INR200 crores

Eligible applicants: Includes payment banks with 5 years operations which can convert to SFBs

Corporate structure: Standalone or holding – subsidiary structure provided

Promoters contribution: 40% from commencement and up to 5 years, maximum 30% by 10 years and
maximum 15% by 15 years

Promoters contribution – UCBs: 26% from commencement and up to 5 years

Approvals required for changes in promoter shareholding – RBI approval needed for change
of 10% or more in shareholding pattern in promoter entity

Single Shareholder’s voting rights – Capped at 26% of total voting rights

2014 guidelines

Minimum capital for new SFBs: INR100 crores

Eligible applicants: No provisions for payment banks.

Corporate structure: Standalone or holding – No provisions

Promoters contribution: 40% from commencement and up to 5 years, maximum 30% by 10 years and
maximum 26% by 12 years

Promoters contribution – UCBs: No provisions

Approvals required for changes in promoter shareholding – No provisions

Single Shareholder’s voting rights – Capped at 10% of total voting rights

SFBs shall be subject to all prudential norms and regulations as applicable to existing commercial banks including the
requirement to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
SFBs also have to extend 75% of its Adjusted Net Bank Credit to priority sector lending.

Payments Banks – Small Financial Banks

While Payment Banks in India did not get much traction in India, the differentiating factor between SFBs and Payments Bank is that Payment Banks cannot lend to its customers and their funds will be required to be parked in government paper or bank deposits. SFBs on the other hand can undertake banking activities such as acceptance of deposits and lending to primarily unserved and underserved sections of society.
Further, unlike Payments Bank wherein it cannot accept deposits greater than INR 100,000 nor can it issue credit cards, no such restrictions are imposed upon the operation and/or activities of the SFB.