Co-op banks can become small finance banks

• 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. It has been decided to allow voluntary transition of UCBs meeting the prescribed criteria into SFBs.
• 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.

About Small Finance banks:

• Small finance banks will be allowed to take deposits from customers. And as against payments banks, small finance banks will also be allowed to lend money to people.
• Most of the entities that have received the 'in-principle' nod include micro-finance institutions. Which means, most customers of small finance banks will account for small and medium enterprises and small businesses. These banks will now be able to provide secured and legal loans to MSMEs and SMEs, bringing them under the ambit of the financial system.
• Small finance banks is another step to bring the unbanked under the ambit of the banking system.
• Small finance banks will provide banking products to the unserved and undeserved sections of the country, which includes small and marginal farmers, micro and small industries, and other organized sector entities, at an affordable cost.
• Finance Minister Arun Jaitley, in his first budget speech in 2014 had said, RBI will create a framework for licencing small banks and other differentiated banks. Differentiated banks serving niche interests, local area banks, payment banks etc. are contemplated to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force”.
• In a way there are like commercial banks because both provide the saving and lending facility, however, small banks have to follow stricter regulations as proposed by RBI.

Guidelines for small finance bank:

• Every small finance bank must have the words -- small finance bank -- in its name.
• They cannot set up subsidiaries to undertake non-banking financial service activities.
• 75% of its Adjusted Net Bank Credit (ANBC) should be advanced to the priority sector as categorized by RBI.
• Maximum loan size to a single person cannot exceed 10% of total capital funds; cannot exceed 15% in the case of a group.
• At least 50% of its loans should constitute loans and advances of up to 25 lakh.
• Small banks can undertake financial services like distribution of mutual fund units, insurance products, pension products, and so on, but not without prior approval from the RBI.
• Small finance banks will be subject to all prudential norms and regulations of the RBI as applicable to existing commercial banks. This will include maintaining cash reserve ratio (CRR) or the percentage of deposits that must be kept aside as a reserve; and statutory liquid ratio (SLR) or the percentage of deposits that must be invested in government securities. Minimum paid-up equity capital requirement of Rs 100 crore.
• The promoter's minimum initial contribution to the paid-up equity capital of such small finance bank s all at least be 40% which can be gradually brought down to 26% within 12 years from the date of commencement of operations.
• A small bank can transform into a full-fledged bank, but only after RBI's approval.
• A fundamental requirement is that it must have 25% of its branches set up in unbanked areas.
• 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.
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By: Vishal