The Reserve Bank of India has decided to allow urban co-operative banks (UCB) to convert into small finance banks (SFB), a move aimed at bringing these entities into mainstream banking.
UCBs currently face regulation by both the RBI and the respective State governments. By turning into SFBs, they will be regulated only by the RBI.
The small finance bank will primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
What can they do?
- Take small deposits and disburse loans.
- Distribute mutual funds, insurance products, and other simple third-party financial products.
- Lend 75% of their total adjusted net bank credit to priority sector.
- Maximum loan size would be 10% of capital funds to the single borrower, 15% to a group.
- Minimum 50% of loans should be up to 25 lakhs.
What can they not do?
- Lend to big corporates and groups.
- Cannot open branches with prior RBI approval for first five years.
- Other financial activities of the promoter must not mingle with the bank.
- It cannot set up subsidiaries to undertake non-banking financial services activities.
- Cannot be a business correspondent of any bank.
The guidelines they need to follow:
The promoter must contribute minimum 40% equity capital and should be brought down to 30% in 10 years.
Minimum paid-up capital would be Rs 100 Cr.
Capital adequacy ratio should be 15% of risk-weighted assets, Tier-I should be 7.5%.
Foreign shareholding capped at 74% of paid capital, FPIs cannot hold more than 24%.
The priority sector lending requirement of 75% of total adjusted net bank credit.
50% of loans must be up to Rs 25 lakh.