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RBI Clarifies Guidelines for Licensing Small Finance Banks in India

Introduction

This document outlines the clarifications provided by the Reserve Bank of India (RBI) regarding the guidelines for licensing Small Finance Banks (SFBs) in the private sector. The objective is to assist potential applicants in comprehending the guidelines and their requirements more easily. Each clarification addresses specific queries and should be understood within the framework of the overall guidelines.

Clarifications on Licensing of Small Finance Banks

Questions on License Surrender and Eligibility

  1. NBFC License Surrender: A group holding two NBFC licenses must fold the operating license into the new bank. The non-operative holding company can continue its operations.
  2. Large Business House Criteria: No specific criteria have been defined for identifying large business houses, including diversified financial services groups.
  3. Existing Group Classification: A group where the NBFC business comprises 80% of total profits can be classified as an industrial and business group.
  4. Definition of Large Industrial and Business Houses: The term requires further clarification for explicit thresholds based on asset size, market capitalization, etc.

Ownership and Control Regulations

  1. Eligibility Criteria: Promoters associated with large business houses or their NBFCs are ineligible to apply for a bank license. The definition of a large business house remains unclear.
  2. Threshold Conditions: No specific thresholds have been clarified to define a business house as large or otherwise.
  3. Definition of Control: For guidelines, a large industrial/business group is defined as one with Rs 1,000 crore in assets and a non-financial sector portion making up 40% or more in total assets or revenue.

Residency and Ownership Conditions

  1. Promoter Eligibility: An individual from a large business or industrial house cannot act as a promoter for an SFB.
  2. NBFC Eligibility: NBFCs that are not part of a large business house can apply for a license.
  3. Meaning of "Owned and Controlled by Residents": This term requires further clarification within the guidelines.
  4. Ownership Definitions: "Owned" and "Controlled" should align with definitions in the Foreign Direct Investment (FDI) policy.
  5. Scope of "Owned and Controlled": Additional clarity is required on notions of ownership and the extent of control.
  6. Ownership by Residents: Companies must be fully owned by residents. The definition of control is critical, including board membership and executive management requirements.

Promoter Group Dynamics

  1. NBFCs and MFI Ownership: NBFCs are required to be entirely (100%) owned by residents, too; board and management control must also align with residency requirements.
  2. Small Finance Bank Structure: Each NBFC or MFI must transition entirely into the new SFB, discontinuing incompatible activities.
  3. Criteria for Ownership: The term "Owned" should be interpreted as having 26% equity or more.
  4. Eligibility for Companies Owned by Non-Residents: Companies with non-resident holding on a non-repatriation basis are excluded from eligibility.
  5. Repatriation Status: Companies allowed under FDI norms that are partially owned by non-residents are ineligible.
  6. Ownership Count: If the promoter entity's shareholding is equal to or more than 26%, it must remain within prescribed limits defined by RBI.

Compliance and Financial Standards

  1. Guidelines on Co-existence: An existing NBFC cannot co-exist with a new bank if it involves lending activities.
  2. Ownership and Control in Joint Ventures: Joint ventures involving different promoters for setting up an SFB are not allowed; however, acquiring new financial investors in compliance is permissible.
  3. Transformation Roadmap: Existing NBFCs must present a roadmap for their associates when applying.
  4. Branch Expansion Plans: Compliance in opening at least 25% of branches in unbanked rural centers is required for initial expansions.
  5. Definition of Branches: Branch definitions are based on provisions of the Banking Regulation Act, which excludes satellite offices.

Conclusion

The guidelines provided by RBI on licensing Small Finance Banks encompass extensive clarifications that ensure understanding and compliance for prospective applicants. It emphasizes the regulatory framework expected for ownership, licensing, control, operational strategies, and adherence to financial norms. All stakeholders interested in establishing an SFB must navigate these clarifications carefully to align their strategies with the outlined regulations. For additional queries, the RBI encourages direct communication to clarify procedural or operational specifications further.