RBI grants approval to 10 small finance banks

The Reserve Bank of India (RBI) on Wednesday announced its decision to grant in-principle approval to 10 entities to set up small finance banks, as part of the efforts to bring non-banked and underbanked sections of society under the financial net.

RBI received 72 applications for small finance banks. Subsequently, Microsec Resources Private Limited, Kolkata withdrew its application. In respect of another application made by Ajay Singh Bimbhet and others, two of the co-promoters withdrew their candidature and thereby the application was deemed to have been withdrawn.

RBI finally selected 10 of the 72 applicants after a detailed scrutiny of their financial soundness, proposed business plan, fit and proper status based on due diligence reports received from the regulators, investigative agencies, banks, etc.

The applicants were scrutinised on the basis of the `Guidelines for Licensing of Small Finance Banks in the private sector' issued on 27 November 2014. The entities selected for issue of small finance bank licences include:

• Au Financiers (India) Ltd (Jaipur),
• Disha Microfin Private Ltd (Ahmedabad), Equitas Holdings P Limited (Chennai),
• ESAF Microfinance and Investments Private Ltd (Chennai),"
• Janalakshmi Financial Services Private Limited (Bengaluru),
• RGVN (North East) Microfinance Limited (Guwahati),
• Suryoday Micro Finance Private Ltd (Navi Mumbai),
• Ujjivan Financial Services Private Ltd (Bengaluru) and Utkarsh Micro Finance Private Ltd (Varanasi).

The `in-principle' approval granted will be valid for 18 months to enable the applicants to comply with the requirements under the guidelines and fulfil other conditions as may be stipulated by the RBI.

On being satisfied that the applicants have complied with the requisite conditions laid down by it as part of `in-principle' approval, the RBI would consider granting them a licence for commencement of banking business under section 22(1) of the Banking Regulation Act, 1949.

Until a regular licence is issued, the applicants cannot undertake any banking business.

The RBI has selected these applicants after three different committees contributing to the final decision, backed by detailed case study for each applicant.

The selection process involved a preliminary scrutiny of all the applications involving prima facie eligibility, including the ability to raise the minimum initial capital and the status of ownership and control by residents as per the guidelines was carried out by the RBI team.

The findings of the preliminary scrutiny were presented to an external advisory committee (EAC) constituted under the chairmanship of Usha Thorat, former deputy governor of the RBI. The EAC recommended applications to be taken up for detailed examination based on prima facie eligibility vis-à-vis the guidelines. 

The detailed scrutiny involved assessment of financial soundness, proposed business plan, fit and proper status based on due diligence reports received from the regulators, investigative agencies, banks, etc.

An important proposition was to reach into unbanked areas and underserved sections of the population.

An Internal Screening Committee (ISC), consisting of the governor and the four deputy governors of the RBI thereafter examined the applications. The ISC also deliberated on the rationale of the recommendations made by the EAC.

After scrutinising all the applications, the ISC made its independent recommendations to the Committee of the Central Board (CCB) of the RBI. At the CCE meeting held on 16 September 2015, the external members of the CCB went through the notes, recommendations of EAC and ISC and decided the list of applicants for granting in-principle approval.

Going forward, the Reserve Bank plans to revise guidelines based on the experience gained from this licensing round to appropriately revise the guidelines and move to giving licences more regularly, that is, virtually ''on tap''.

It may be recalled that the Committee on Financial Sector Reforms, 2009 chaired by Raghuram G. Rajan, had examined the relevance of small banks in the Indian context. The committee had opined that there was sufficient change in the environment to warrant experimentation with licensing of small banks.

It recommended allowing more entry to private well-governed deposit-taking small finance banks (SFBs) offsetting their higher risk from being geographically focused by requiring higher capital, a strict prohibition on related party transactions, and lower allowable concentration norms.

This was reiterated in the policy discussion paper on Banking Structure in India – The Way Forward that was placed by the Reserve Bank of India on its website on August 27, 2013.

''After making suitable changes to current framework, a structure will be put in place for continuous authorisation of universal banks in the private sector in the current financial year. RBI will create a framework for licensing 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, unorganised sector, low income households, farmers and migrant work force'', finance minister Arun Jaitley had said while presenting the Union Budget 2014-2015 on 10 July 2014.

Draft guidelines for licensing of small finance banks were released for public comments on 17 July 2014.

Based on the comments and suggestions received on the draft guidelines, final guidelines for licensing of small finance banks were issued on 27 November 2014. The Reserve Bank also issued clarifications to various the queries (numbering 176) on the guidelines on 1 January 2015.

The EAC, chaired by Usha Thorat, former deputy governor of the RBI, had former Sebi member M S Sahoo, , Indian Institute of Management (IIM) Bangalore professor M S Sriram and, National Payments Corporation of India chairman M Balachandran as members. Later, as M S Sahoo, recused himself from the committee on account of his appointment as a member of Competition Commission of India, RBI, in April 2015, appointed Ravi Narain, Vice Chairman, National Stock Exchange of India Limited to the committee.