Differentiated banking in the country In last few months Reserve Bank of India and Government of India has taken few steps to further differentiated banking in the country. This is a part of its broader plan to kick off differentiated banks in the country. Small finance banks will be similar to commercial banks and will undertake basic banking activities of accepting deposits and lending to un-served and under-served sections.

1. Small Finance Banks: Big Small Steps towards “Financial Inclusion”
2015
Manoj Rawat
Head, Agribusiness Group
RBL Bank, Mumbai
mkrawat@gmail.com
The views expressed in this article are purely personal.
Small Finance Banks: Big Small Steps towards “Financial Inclusion”
The Reserve Bank of India (RBI) has granted ‘in-principle’ approval for 10 companies to
set up small finance banks. The approval will be valid for 18 months to enable the
applicants to comply with the requirements.
Differentiated banking in the country
In last few months Reserve Bank of India and Government of India has taken few steps
to further differentiated banking in the country. This is a part of its broader plan to kick
off differentiated banks in the country, the Reserve Bank of India (RBI) on 16
September, 2015 granted small finance bank licenses to 10 entities, eight of which are
microfinance institutions. Last month, the central bank granted payments bank license
to 11 entities.
(i) Universal banking license: Two players — IDFC and Bandhan (April 2, 2014)
(ii) Payments banks: 11 players – to help deepen financial inclusion (August 19,
2015)
(iii) Small finance banks: 10 players — to undertake basic banking activity for
under-banked areas (September 16, 2015)
The 10 “in principle approval” for Small Finance Bank
1. Au Financiers (India), Jaipur
2. Capital Local Area Bank, Jalandhar
3. Disha Microfin, Ahmedabad
4. Equitas Holdings, Chennai
5. ESAF Microfinance and Investments, Chennai
6. Janalakshmi Financial Services, Bengaluru
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Manoj Rawat | mkrawat@gmail.com

2. 7. RGVN (North East) Microfinance, Guwahati
8. Suryoday Micro Finance, Navi Mumbai
9. Ujjivan Financial Services, Bengaluru
10. Utkarsh Micro Finance, Varanasi
Small Finance Banks ( SFB)
Small finance banks will be similar to commercial banks and will undertake basic
banking activities of accepting deposits and lending to unserved and under-served
sections. The objectives of setting up of Small Finance Bank will be primarily for
furthering “financial inclusion by
(i) Provision of savings vehicles primarily to unserved and underserved sections of the
population. At least 25% of its branches in unbanked rural centers with no restriction in
areas of operation. These applicants will not have hindrance to expand to other
regions in due course
(ii) Supply of credit to small business units; small and marginal farmers; micro and
small industries; and other unorganized sector entities, through high technology-low
cost operations
(iii) Non-risk sharing simple financial services activities not requiring any fund
commitment, such as distribution of MFs, insurance products, pension products, etc.
(iv) The Small Finance Bank can also become a Category II Authorized Dealer in
foreign exchange business
Focus is on Bank the un-banked
The RBI received 72 applications for small finance banks. An important factor remained
reach into un-banked areas and under-served sections of the population. It is expected
that the Small Finance Bank should primarily be responsive to local needs. The Small
Finance Bank will be required to use the word “Small Finance Bank” in its name in
order to differentiate it from other banks.
Build Capabilities for Priority Sector Lending
According to RBI norms, small finance banks will be allowed to undertake basic
banking activities of acceptance of deposits and lending to unnerved and underserved
sections including small business units, small and marginal farmers, micro and small
industries and unorganised sector entities. It is mandated that 75 per cent of the loans
should be extended to sectors that are classified under priority sector. The PSL targets
are significantly higher compared to the scheduled commercial banks i.e., 40 percent of

3. Small Finance Banks: Big Small Steps towards “Financial Inclusion”
2015
ANBC. Therefore, a Small Finance Bank would need to quickly build capabilities to
lend to these sectors in a cost-effective sustainable way.
Regulatory norms and Go to Market approach
Small finance bank will be subject to all prudential norms and regulations as applicable
to commercial banks, including the requirement of maintaining cash reserve ratio and
statutory liquidity ratio
The minimum paid up voting equity capital has been fixed at Rs 100 crores with a
minimum CAR of 15% on risk weighted assets. Once the net worth reaches Rs. 500
Crore, listing will be mandatory within 3 years of reaching the net worth. For others
listing is voluntary. The aim is to create banking entity which is adequately capitalized,
financially inclusive and has a competitive business model.
The promoter’s minimum initial contribution to at least 40% locked in for 5 years –
need to be brought down to 30% of the paid-up voting equity capital within a period of
10 years, and to 26% within 12 years.
Promoter can set of Small Finance Bank and Payments Bank
While the RBI may allows for a promoter/ promoter group to run both a Small Finance
Bank as well as a Payments Bank under a holding company (NOFHC), the guidelines
do not allow a promoter/ promoter group to hold a Small Finance Bank as well as a
Universal Bank license at the same time.
Small Finance Banks cannot be Business Correspondent
The Small Finance Bank cannot be a Business Correspondent (BC) for another bank.
However, it can have its own BC network Priority Sector Lending (PSL)
Strong Corporate Governance
(i) The Board of the Small Finance Bank should have a majority of independent
directors,
(ii) The Small Finance Bank should comply with the corporate governance
guidelines including ‘fit and proper’ criteria for Directors as issued by RBI
from time to time
(iii) The voting rights in private sector banks are capped at 10%, which can be
raised to 26% in a phased manner by the RBI. Any acquisition of 5% or more
of equity shares in a private sector bank will require prior approval of RBI.
(iv) SFB cannot set up subsidiaries to undertake non-banking financial services in
the areas of operation of Small Finance Bank;
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Manoj Rawat | mkrawat@gmail.com

4. Technology Driven
The operations of the Small Finance Bank should be technology driven from the
beginning, conforming to generally accepted standards and norms; while new
approaches (such as for data storage, security and real time data updates) are
encouraged, a detailed technology plan for the same should be furnished to RBI. The
Small Finance Bank should Customer Grievances Cell to handle customer
complaints. The Small Finance Bank will come under the purview of RBI’s Banking
Ombudsman Scheme, 2006.
Universal Banks of “tomorrow”
The Regulator would want Small Finance Bank to become the Universal Bank of
tomorrow. In this way, the Regulator would have an excellent opportunity to witness
and assess the growth of a Small Finance Bank and if that bank is capable of making the
transition to the next level. For the Small Finance Banks its an opportunity to transition
into “Full-fledged Bank” of tomorrow.
Manoj Rawat
mkrawat@gmail.com
The views expressed in this article are purely personal.