Which Small Finance Bank (SFB) got license from RBI (in Oct’ 21) to become India’s 12th SFB?

Q. Which Small Finance Bank (SFB) got license from RBI (in Oct’ 21) to become India’s 12th SFB?

(a) Paytm Small Finance Bank

(b) Jana Small Finance Bank

(d) Unity Small Finance Bank

Answer.

d, Unity Small Finance Bank

Solution.

The Reserve Bank of India (RBI) issued the ‘Small Finance Bank’ (SFB) licence to Centrum-BharatPe’s ‘Unity Small Finance Bank Ltd (USFBL)’ to carry on an SFB business in India

USFBL is a consortium that was established jointly by Centrum Financial Services Ltd (CFSL), a subsidiary of Centrum Capital Limited (CCL), and Resilient Innovations Private Limited (BharatPe).
They are aspiring to make USFBL as ‘India’s 1st‘ digital SFB.
With the establishment of USFBL, the number of SFBs in India was increased to 12.

About Small Finance Bank (SFB):

SFBs are the financial institutions that will provide financial services to the unserved and unbanked regions of the country.
They will be established as public limited companies in the private sector under the Companies Act, 2013, and governed by the provisions of RBI Act, 1934 and the Banking Regulation Act, 1949.
Eligibility: Resident individuals/professionals with 10 years of experience in banking and finance will be eligible as promoters to set up SFBs.
Capital Requirement: The minimum paid-up equity capital for SFB should be Rs 200 crores (US$28 million).
Capital Small Finance Bank followed by Equitas Small Finance Bank were the first two SFBs formed in India.

What is meant by small finance banks?

Banks that provide basic banking activities like taking deposits, lending to unorganized entities, micro and small industries, small and marginal farmers, and other underserved sections are known as small finance banks. With the aim of creating financial inclusion, it was created by the Reserve Bank of India.

Objectives of the RBI initiative

The objectives of setting up of small finance banks are as follows:

(a) To further the aim of financial inclusion by providing an avenue of savings for the general masses

(b)To ensure the supply of credit for small business units, small and marginal farmers,micro and small industries; and other unorganised sector entities is maintained.

To get the latest in current affairs, visit the linked article.

What are Small Finance Banks (SFBs)?

Small finance banks are a type of niche bank common in India. These small finance banks with the approved licenses can provide basic banking services such as acceptance of deposits and lending to those sections of the Indian economy not serviced by mainstream nationalized banks. These sections include small business units, small and marginal farmers, micro and small industries and unorganized sector entities.

A brief summary of the regulations involving SFBs are highlighted below:

Existing non-banking financial companies (NBFC), microfinance institutions (MFI) and local area banks (LAB) can apply to become small finance banks.
They can be promoted either by individuals, corporate, trusts or societies.
They are established as public limited companies in the private sector under the Companies Act, 2013.
They are governed by the provisions of Reserve Bank of India Act, 1934, Banking Regulation Act, 1949 and other relevant statutes.
The banks will not be restricted to any region.
They were set up with the twin objectives of providing an institutional mechanism for promoting rural and semi-urban savings and for providing credit for viable economic activities in the local areas.
The promoters should have 10 years’ experience in banking and finance. The promoters stake in the paid-up equity capital will be at least 40% initially but must be brought down to 26% in 12 years. Joint ventures are not permitted. The foreign shareholding will be allowed in these banks as per the rules for Foreign Direct Investment (FDI) in private banks in India.
At a net worth of ₹500 crores, the listing will be mandatory within three years. Small finance banks having a net worth of below ₹500 crores could also get their shares listed voluntarily.

Key takeaways of the RBI Initiative

The SFBs are expected to focus primarily on accepting deposits and lending to small business units, small and marginal farmers, micro and small industries and other unorganised sector entities, currently underserved by regular commercial banks.
The key takeaway of this move is the RBI’s efforts to promote niche banking. Commercial banks are largely interested in funding large and medium corporations or giving out loans for home and vehicle purchases. On the other hand, it is not easy for diamond cutting and polishing units, job work fabricators or small restaurant owners to get working capital finance support. Lending to them is a specialised affair, just as gold financing is.
These are segments where regular banks have gradually withdrawn, with their place being partly taken by various non-banking financial companies. SFBs can probably do even better in filling the gap. The entities that have been given licences are mainly microfinance institutions that have already reached out to remote hinterlands. Currently, they are mainly on-lending funds from banks, which work out to be rather costly for the ultimate small borrowers. As a result, there were little to no regulations regarding these institutions for a time and this initiative aims to fix that.
Becoming SFBs will allow them to directly take deposits, which will bring down their cost of funds and translate into lower interest rates for clients. Regional Rural and urban cooperative banks ought to have performed this role, which they clearly haven’t — not least due to political interference and being weighed down by high fixed costs.
The SFBs may be in a better position to exploit the huge business opportunity in funding small and medium enterprises. The RBI expects them to be high technology-low cost operators, while also bringing in innovations in service delivery.
It is heartening to see the RBI change its conservative image, which ensured that till early 2014, only 12 new bank licences had been awarded since the economic reforms of 1991, that brought about the era of liberalisation in the Indian economy. India needs a more dynamic and flexible banking system. The SFBs and payments banks are a good initiative in that direction. Extending the formal banking system’s reach will also ensure better monetary transmission, important for the effectiveness of the RBI’s own interest rate policy actions.