Small Finance Banks : New Category of Differentiated Banks

Abstract

In September 2015, Reserve Bank of India (RBI) announced in principle approval to ten entities for setting up yet another category of differentiated banks, named as Small Finance Banks. Eight out of ten successful candidates are already working as Micro Financing Institutions (MFIs). The primary objective of setting up of small finance banks is to further promote financial inclusion by provision of savings and credit to small business units, small and marginal farmers, and other unorganised sector entities, through high technology-low cost operations. The small finance banks will have minimum paid-up equity capital of Rs. 100 crore with minimum initial promoter's contribution of 40% of paid-up equity capital of banks and locked in for a period of five years. Unlike Payment Banks earlier announced a month ago, these banks are permitted to engage in lending activities and are subject to Reserve Bank of India's (RBI) regulatory frame work for other universal banks. The entities granted approval for setting up new banks have shown successful performance as MFIs, but will be faced with significant challenges while functioning in the new role of small finance banks with different asset and liability products but have the potential to seize the opportunity opened before them. The paper analyses various nuances of new kind of differentiated banks opened by RBI.