The Reserve Bank of India (RBI) has granted its in-principle permission for 10 out of 72 applicants to foray into the rural and untrapped segments of households with set conditions, which they were asked to fulfil before finally allowing them to open banks.
Based on Bandhan Microfinance that romped into full-fledged Bandhan bank this year, the country’s central bank is exploring the possibility of allowing these 10 microfinance institutions to switch over to small finance banks (SFBs)in order to enter both deposit holding and payment segments of the banking sector.
As per earlier RBI rules, most of these microfinance institutions were under non-banking financial corporations with MFI or microfinance institution tag and they were barred from accepting deposits from their members. The new window to banking will open an entirely different banking atmosphere that will be competitive and focussed on rural penetration fulfilling the inclusive policy of the government.
The RBI said the nod to these 10 microfinance banks is valid for 18 months to enable the applicants to comply with the requirements under the Guidelines and pre-conditions stipulated by the RBI. "On being satisfied that the applicants have complied with the requisite conditions laid down by it as part of in-principle approval, the RBI would consider granting them a licence for commencement of banking business under Section 22(1) of the Banking Regulation Act, 1949," said a statement from the RBI recently.
Before gaining a regular banking licence, a small finance bank should:
- have 75 percent of its adjusted net bank credit to be extended to priority sector
- atleast 25 branches in unbanked rural areas.
- 50 percent of loan portfolio to constitute loans & advances of upto Rs 25 lakh
- Maximum loan size & investment limit to single obligor restricted to 10 percent of capital funds
- Maximum loan size & investment limit to a group restricted to 10 percent of capital funds
- Require minimum paid up equity capital of Rs 100 crore.
- Promoter stake must be at 40 percent in first 5 years
- Promoter stake to be brought down to 30 percent within 10 yrs, 26 percent in 12 years
- Listing mandatory within 3 years of reaching Rs. 500 crore net worth
- Maximum foreign shareholding of 74 percent allowed
- CRR, SLR requirement as applicable to existing commercial banks from Day 1.
The Small Finance banks are:
1. Au Financiers (India) Limited, Jaipur
2. Capital Local Area Bank Limited, Jalandhar
3. Disha Microfin Private Limited, Ahmedabad
4. Equitas Holdings P Limited, Chennai
5. ESAF Microfinance and Investments Private Limited, Chennai
6. Janalakshmi Financial Services Private Limited, Bengaluru
7. RGVN (North East) Microfinance Limited, Guwahati
8. Suryoday Micro Finance Private Limited, Navi Mumbai
9. Ujjivan Financial Services Private Limited, Bengaluru
10.Utkarsh Micro Finance Private Limited, Varanasi.
Now that they are given the initial nod, these microfinance institutions should convert their ownership structure from foreign to domestic, while their base and reach remains unaltered. With their assets reaching more than requirement for paid-up capital, these MFIs can easily raise the initial equity paid up capital of Rs.100 crore and they have more than 25 branches in rural areas.
As fulfilling the guidelines and norms set are within the reach, all these 10 successful applicants will soon change into small finance banks. The brighter side of it is that both small banks and payment banks is to create competition in the banking sector at serving the rural and unbanked segment and widen the reach of the poorer sections into the goal of wider financial inclusion.