‘In-principle’ nod, RBI clears the way for 10 small banks

Big names which failed to get licence includes Dewan Housing, former Union Bank CMD Cherian Varghese, IIFL Holdings, Lulu Finance, SKS Microfinance and UAE Exchange.

By: ENS Economic Bureau | Mumbai | Updated: September 17, 2015 8:59 am

Taking the financial inclusion agenda forward, the Reserve Bank of India (RBI) on Wednesday granted ‘in principle’ approval to 10 companies to set up small finance banks aimed at giving loans to farmers and small businesses.

The selected applicants are: Au Financiers (Jaipur), Capital Local Area Bank (Jalandhar), Disha Microfin (Ahmedabad), Equitas Holdings (Chennai), ESAF Microfinance and Investments (Chennai), Janalakshmi Financial Services (Bengaluru), RGVN (Northeast) Microfinance (Guwahati), Suryoday Micro Finance (Navi Mumbai), Ujjivan Financial Services (Bengaluru) and Utkarsh Micro Finance (Varanasi).

The central bank had received 72 applications for setting up small finance banks. Some of the big names which failed to get the licence included Dewan Housing, former Union Bank CMD Cherian Varghese, IIFL Holdings, Lulu Finance, SKS Microfinance and UAE Exchange. The RBI considered existing microfinance companies and small finance companies for granting small finance bank licences.

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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. There won’t be any restrictions in the area of operations of small finance banks. The minimum paid-up equity capital for small finance banks shall be Rs 100 crore. The promoter’s minimum initial contribution to the paid-up equity capital of such a small finance bank should at least be 40 per cent and gradually brought down to 26 per cent within 12 years from the date of commencement of business of the bank.

The RBI had granted approval to 11 entities for launching payments banks in August 2015. It had given approval to IDFC and Bandhan to start universal banks last year.

The “in-principle” approval granted to the ten small banks 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, the RBI would consider granting them a licence for commencement of banking business under the Banking Regulation Act, 1949.

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

An important factor was proposed reach into unbanked areas and underserved sections of the population. The EAC held detailed discussions in multiple sittings on the applications based on the information presented to it. The EAC then submitted its recommendations to the RBI. An Internal Screening Committee (ISC), consisting of the governor and the four deputy governors of the RBI thereafter examined the applications.

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