RBI seeks to enhance supply of credit to small borrowers and encourage competition
The Reserve Bank of India (RBI) will issue draft guidelines for ‘on-tap’ licensing of Small Finance Banks (SFB) by the end of August 2019 with a view to enhance supply of credit to small borrowers and encourage competition. On-tap licensing is a time-efficient feature that will allow parties to obtain the licence on-demand basis and eligible parties won’t have to wait.
In September 2015, the RBI had granted ‘in-principle’ approval to 10 applicants for SFBs, including entities such as Ujjivan Financial Services, Equitas Holdings and Au Financiers (India). The RBI had also expressed its intention to use the learning from the licensing round to appropriately revise the guidelines and move to giving licences more regularly or virtually ‘ón tap’.
Eight of the ten small finance banks have also been included in the second schedule of the RBI Act, 1934. “A review of the performance of small finance banks reveals that they have achieved their priority sector targets and thus attained their mandate for furthering financial inclusion. Hence, there is a case for more players to be included to enhance access to banking facilities to the small borrowers and to encourage competition,” the RBI statement on Developmental and Regulatory Policies read.
However, the RBI indicated more time is needed to review the performance of payments banks before considering the licensing of this category of banks could be put ‘on tap’.
In November 2014, the regulator had issued guidelines for licensing of payments banks and SFBs in the private sector. As per the guidelines, resident individuals/professionals with 10-year experience in banking and finance; and companies and societies owned and controlled by residents would be eligible to set up SFBs.
Existing non-banking financial companies, micro-finance institutions and local area banks that are owned and controlled by residents could also opt for the conversion into SFBs. The minimum paid-up equity capital for small finance banks should be Rs 100 crore, while the promoter’s minimum initial contribution to be at least 40%, the guidelines stated.