RBI's push to extend credit to the excluded- SFB licenses up for grabs

Jubilant with the overall success of SFBs in pushing credit to the hinterland, RBI has issued draft guidelines on accepting more applications for Small Finance Banks.

Eligibility:

Resident Individuals having at least 10 years of experience in Banking/Finance industry and Companies/Societies with successful track record of 5 years are eligible for applying to SFB. Large industrial groups and promoters with already universal bank license are not eligible to participate in the application process. To start operations, minimum net worth of 200 cr is mandatory. 

Ownership guidance:

Promoters need to lock in their initial contribution of 40% paid up equity capital for at least 5 years followed by diluting the stake to 40%/30%/10% within 5/10/15 years of commencing operations. Listing is mandatory within 3 years of reaching 500 Cr net worth. Any stake sale of above 5% and above requires prior approval of RBI

Business Model:

Even though SFBs are allowed to operate in as many diverse segments as universal banks are allowed, RBI has placed limits are placed on ticket size astutely. Maximum ticket size of loan should be within 25 lakhs for 50% of loan portfolio and around 75% of ANBC, Aggregate Net Banking Credit, should be towards priority sector lending, which could increase the cost of servicing loans which is inversely proportional to the ticket size. Unlike Payment Banks, SFBs are not allowed to be business correspondents of other banks. SFBs are can merely distribute low risk based products without committing own funds and are also eligible for AD Cat II license

Risk Management

Exposure to single entity and group are capped to 10% and 40% of capital funds respectively. Though it is clarified that SFBs are governed by Basel II guidelines, CAR ratios are set higher at 15% of RWA. At the same time, RBI is silent on important leverage ratio that limits bank's expansion without necessary capital

In sum, RBI has taken the right steps in considering extension of SFB licenses because of the tremendous success of SFB sector in extending the credit to the rural areas. Also, it appears that RBI is keen on improving the efficiency in banking as private entities are favored over large corporates. I believe SFBs will be a crucial cog in the overall banking system with in next 5 years.  

For more details, please refer https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=48153

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