On-tap licence regime: RBI doubles SFB net worth floor to Rs 200 crore

The Reserve Bank of India’s (RBI’s) new draft guidelines for on-tap licensing of small finance banks (SFBs) said the minimum net worth of such banks should be doubled from Rs 100 crore to Rs 200 crore and that the promoters’ stake be brought down to a maximum of 15 per cent within 15 years, as against the existing norm of 26 per cent within 12 years, from the date of commencement of business of the bank.

Aligning the norms with those of universal banks, the RBI said promoters wishing to set up an SFB could do so either as a standalone entity or under a holding company, which shall act as the promoting entity of the bank. However, if there is an intermediate company between the SFB and its promoting entity, it should be a non-operative financial holding company (NOFHC).

A payments bank can also apply for converting into an SFB if it meets the eligibility criteria, said the RBI, which released the guidelines on Friday. Moreover, if a promoter of a payments bank desires to set up an SFB, both the banks should be under the NOFHC structure.

The RBI has stated that the key criteria for licences will be the entity’s ability to serve smaller customers and that SFBs may be a more appropriate vehicle for local players or players who are focused on lending to unserved or underserved sections of society. Thus, proposals from public sector entities and large industrial house/business groups, including from non-banking financial companies (NBFCs) promoted by them, entities promoted by states, or subsidiaries of development financial institutions, will not be entertained. 

A business group with assets of Rs 5,000 crore or more with non-financial business accounting for 40 per cent or more in terms of total assets or income will be considered to be a large industrial house/business group, and will not be permitted. The RBI will not allow joint ventures by different promoter groups to set up SFBs either. 

An SFB can become a universal bank, but it should meet the net worth requirement as applicable to universal banks, besides its satisfactory track record of performance as an SFB for a minimum period of five years. On transition into a universal bank, it will be subjected to all the norms including the NOFHC structure, the RBI said.

Primary (urban) co-operative banks that want to convert into SFBs have been allowed to continue with a minimum paid-up equity capital of Rs 100 crore to begin with, but they will have to increase their minimum net worth to Rs 200 crore within five years.

The revised draft guidelines were issued after reviewing the performance of the 10 SFBs in existence now.

Once an SFB reaches a net worth of Rs 500 crore, it has to mandatorily go for listing within three years. But SFBs that have a net worth of less than Rs 500 crore may also get their shares listed voluntarily, subject to its fulfilment of the market regulator’s criteria. This was the case earlier also.

According to the RBI, the promoters of an SFB have to hold a minimum of 40 per cent of the paid-up voting equity capital of the bank, which shall be locked in for a period of five years from the date of commencement of business of the bank.

According to the RBI, among the many objectives of setting up an SFB, the primary one would be to undertake deposit taking and lending activities to unserved and underserved sections, including small business units, small and marginal farmers, micro and small industries and unorganised sector entities.

SFBs can also indulge in the distribution of mutual fund units, insurance products, and pension products with the prior approval of the RBI and after complying with the requirements of the sectoral regulator for such products. Only after three years from the date of commencement of operations, SFBs can, on a non-risk sharing basis, distribute third-party financial products without prior approval from the RBI.

The entities eligible for being promoters to set up an SFB, according to the RBI, include individuals who have at least 10 years of experience in the banking and financial sector and have a successful track record of running their businesses for at least five years.

Moreover, existing NBFCs, micro finance institutions (MFIs), and local area banks (LABs) in the private sector, which have a successful track record of running their businesses for at least a period of five years, can also opt for conversion into SFB. In such a case where an NBFC, MFI and LABs wish to convert itself into an SFB, the entity has to have a minimum net worth of Rs 200 crore or else it has to infuse additional paid-up voting equity capital to achieve net worth of Rs 200 crore within 18 months of getting approval from the RBI. SFBs have to maintain a minimum capital adequacy ratio of 15 per cent with Tier 1 capital at 7.5 per cent.

RBI's draft guidelines

• Criterion revised to Rs 200 crore from Rs 100 crore earlier
• Promoters' stake in SFBs should be brought down to 15% in 15 years
• Existing payments banks can convert into SFB if they meet the criteria
• SFBs have to mandatorily list within 3 years of net worth reaching Rs 500 crore
• Can distribute third-party financial products after 3 years of operation