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The Rapid Emergence Small Finance Banks




Recently, several small finance banks have mushroomed quite rapidly, giving you multiple options for banking. The Reserve Bank of India announced that it would come out with some guidelines for issuance of ‘non-tap’ licenses for the small finance banks. This is in order to promote banking facilities for the small borrowers and for encouraging competition in this sector. The Reserve Bank of India has rendered sanctioned hypothetically to ten entities for entering the small finance banking sector in September 2015.

The ‘on tap’ licensing shall allow the entities to approach the Reserve Bank of India (RBI) for acquiring licenses for small finance banks on meeting certain criteria laid down by RBI. The entities eligible for licenses would not have to wait for it for long, and it will be available on demand.
In its statement on developmental and regulatory policies, RBI mentioned that it was notified in the Guidelines for Licensing of “Payment Banks” and “Small Finance Banks” in the private sector on November 27, 2014. The RBI also stated that after gaining experience in dealing with these banks, it would consider ‘on tap’ license of these banks. In regards to Small Finance Banks, it was issued to ten such banks. Out of ten Small Finance Banks, eight have also been included in the second schedule of the RBI Act, 1934. The performance evaluation of the Small Finance Banks reveals that they have achieved their priority sector targets and hence achieved their mandate for promoting financial inclusion.

Among the ten entities, some of the major names that have come up in recent times are Ujjivan Financial Services Pvt Ltd, Janalakshmi Financial Services Pvt Ltd, ESAF Microfinance and Investments Pvt Ltd, and Equitas Holdings Ltd. The other names include Disha Microfin Pvt Ltd, RGVN (North East) Microfinance Ltd, Au Financiers (India) Ltd, Capital Local Area Bank Ltd, Utkarsh Micro Finance Pvt Ltd, and Suryoday Micro Finance Pvt Ltd.

Thus, there is a chance for more players to be included to improve access to banking facilities to small burrowers and to promote competition. Small Finance Banks provide basic banking service to the customers like accepting deposits and lending to unserved and underserved sections like small business units, micro and small industries, small and marginal farmers, and the entities in the unorganized sector.

The RBI also observed that, over the years, corporate group structures have become quite complicated which involves multiple layering and leveraging which has led to more interconnectivity to the financial system via their access to public funds. In the context of recent development, there is a need to strengthen the corporate governance framework of Core Investment Companies (CICs).

RBI introduced a spate framework in 2010 for the regulation of systematically important CICs identifying the difference in the business model of a holding company proportional to other non-banking financial companies. For reducing the risk of excessive leverage, the Basel Committee on Banking Supervision (BCBS) designed the Basel III Leverage Ratio (LR) which is a simple, transparent, and a non-risk-based measure to increase accessible risk-based capital adequacy requirements. In terms of the framework on leverage ratio put in place by the Reserve bank, banks are being monitored against an indicative leverage ratio of 4.5 percent. These guidelines have executed the job of disclosures and also as the basis for parallel run by the banks. The final minimum leverage ratio was to be demanded by taking them into consideration for final rules, which was recommended by the Basel Committee by 2017 end. The new micro-finance banks are indeed opening new avenues of banking to the people who found it a bit difficult to borrow money from the regular banks for establishing their own enterprise.  

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