𝐑𝐁𝐈’𝐬 𝐩𝐫𝐮𝐝𝐞𝐧𝐭 𝐨𝐯𝐞𝐫𝐬𝐢𝐠𝐡𝐭 𝐢𝐧 𝐠𝐫𝐚𝐧𝐭𝐢𝐧𝐠 ‘𝐨𝐧 𝐭𝐚𝐩’ 𝐒𝐦𝐚𝐥𝐥 𝐅𝐢𝐧𝐚𝐧𝐜𝐞 𝐁𝐚𝐧𝐤𝐢𝐧𝐠 𝐋𝐢𝐜𝐞𝐧𝐬𝐞

The Reserve Bank of India (RBI) recently refused to grant of in-principle approval to two entities for setting up Small Finance Banks (SFBs) under the “Guidelines for ‘on tap’ Licensing of Small Finance Banks in the Private Sector” of 2019. ‘On Tap’ licensing provides entities year-round ability to apply for bank licenses from RBI as opposed to an earlier system where RBI would invite for such applications.

The Guidelines for ‘On Tap’ Licensing of Small Finance Banks, introduced by RBI, serve a dual purpose of fostering financial inclusion and maintaining financial stability. These guidelines mandate that SFBs should extend 75% of their Adjusted Net Bank Credit to priority sector lending, ensuring the flow of credit to underserved segments such as small business units, farmers, and micro-industries. Moreover, a minimum of 50% of the loan portfolio must comprise loans and advances of up to ₹25 lakh, emphasizing the support to small borrowers.

𝐅𝐚𝐜𝐭𝐨𝐫𝐬 𝐜𝐨𝐧𝐬𝐢𝐝𝐞𝐫𝐞𝐝 𝐛𝐲 𝐑𝐁𝐈 𝐟𝐨𝐫 𝐠𝐫𝐚𝐧𝐭𝐢𝐧𝐠 𝐒𝐅𝐁 𝐋𝐢𝐜𝐞𝐧𝐬𝐞

RBI’s decision-making process for granting SFB licenses revolves around several crucial factors outlined in the guidelines. Firstly, financial inclusivity holds paramount importance, as outlined in Clause 2 of the Guidelines. The RBI assesses the applicant’s business plan to ascertain its commitment to furthering financial inclusion objectives. Secondly, a robust capital structure as mentioned in Clause 5 of the Guidelines is vital for the sustainability of the ‘financial inclusion’ agenda, with preference given to applicants with a strong capital base, considering the nature of SFB operations.

Thirdly, RBI evaluates the management track record and governance practices of the promoter groups, scrutinizing the ‘fit and proper’ status of promoters stipulated under Clause 3, their professional experience, integrity, corporate governance practices and board composition provided under Clause 12, and the extent of independence of SFBs from their promoter group companies. In addition, applicants must satisfy further conditions outlined in Clause 13. These conditions entail demonstrating a strong business and technological model, highlighting their capacity to utilize modern technologies effectively for efficient banking operations. Lastly, sustainable governance practices are essential, ensuring the long-term stability and integrity of the SFB.

A copy of the Reserve Bank of India (RBI) Guidelines for On Tap licensing for SFBs is enclosed herewith.

Readers are welcome to send their views to Regstreet Law Advisors at info@regstreetlaw.com