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Take a look at the essential events, concepts, terms, quotes, or phenomena every day and brush up your knowledge. Here’s your UPSC Current Affairs knowledge nugget for today on transition from a small finance bank (SFB) to a universal bank.
(Relevance: The topic of banking forms an important part of the UPSC CSE syllabus. Previously, questions have been asked on various dimensions of it; thus, knowing about the small finance banks becomes important.)
The Reserve Bank of India has decided to grant ‘in-principle’ approval to AU Small Finance Bank Ltd. (AUSFB) for transitioning from a small finance bank (SFB) to a universal bank. The universal bank status will allow AU Bank to offer a wide range of financial services and products under one roof without many restrictions, unlike a small finance bank. In this context, let’s understand what SFBs are and the criteria for transitioning into a universal bank.
1. The banking sector plays a key role in the function of the economy. Apart from commercial banks, the Indian economy has witnessed the rollout of some new banking models like payments and SFBs under the regulation of the Reserve Bank of India (RBI).
2. SFBs in India are a specific segment of banking created by RBI, under the guidance of the Government of India. The objective of setting up SFBs is to further financial inclusion by extending banking services to unserved and underserved sections of the population and supplying credit to small business units, small & marginal farmers, micro and small industries and other unorganised sector entities through high technology & low-cost operations.
3. The scope of activities of an SFB is primarily to undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections.
In the Union Budget 2014-2015 presented on July 10, 2014, the Finance Minister announced that: “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, unorganized sector, low income households, farmers and migrant work force”.
Following the announcement, the RBI issued following guidelines for SFBs in November 2014:
a. The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore.
b. SFBs are required to open at least 25% of their branches in unbanked rural centres.
c. At least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs. 25 lakh.
d. Further, these banks are required to extend 75% of their adjusted net bank credit to the priority sector.
According to the RBI, “If the small finance bank aspires to transit into a universal bank, such transition will not be automatic but will be subject to fulfilling the minimum paid-up capital/net worth requirement as applicable to universal banks, its satisfactory track record of performance as a small finance bank, and the outcome of the Reserve Bank’s due diligence exercise.” The eligibility criteria for an SFB to transition into a universal bank include:
1. Scheduled status with a satisfactory track record of performance for a minimum period of five years.
2. Listing on a recognised stock exchange and minimum net worth of Rs 1,000 crore as at the end of the previous quarter (audited).
3. Having a net profit in the last two financial years and gross Non-Performing Asset (NPA) and net NPA of less than or equal to 3 per cent and 1 per cent respectively in the last two financial years.
4. They should also meet the prescribed CRAR requirements for SFBs.
1. NBFC is a company registered under the Companies Act, 1956 or Companies Act, 2013, and engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, etc., as their principal business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
2. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).
3. Notably, banks and NBFCs are different entities subject to different statutory and regulatory requirements. However, NBFCs lend and make investments and hence these activities are akin to that of banks. The major differences between banks and NBFCs are given below:
i. NBFCs cannot accept demand deposits;
ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
iii. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available to depositors of deposit taking NBFCs.
Capital to risk weighted assets ratio is arrived at by dividing the capital of the bank with aggregated risk weighted assets for credit risk, market risk and operational risk. The higher the CRAR of a bank the better capitalized it is.
NBFCs can accept deposits from NRIs subject to compliance with Foreign Exchange Management (Deposit) Regulations 2016 (as amended from time to time) and also subject to the condition that the rate of interest on these deposits shall not exceed the rate specified by the Reserve Bank for such deposits with scheduled commercial banks
What is/are the eligibility criteria for an SFB to transition into a universal bank according to the RBI?
1. Scheduled status with a satisfactory track record of performance for a minimum period of three years.
2. Listing on a recognised stock exchange and minimum net worth of Rs 1,000 crore as at the end of the previous quarter (audited).
3. Meet the prescribed CRAR requirements for SFBs.
4. Having a net profit in the last two financial years and gross NPA and net NPA of less than or equal to 3 per cent and 1 per cent respectively in the last two financial years.
Select the correct answer using the codes given below:
(a) 1 and 4 only
(b) 1, 2 and 4
(c) 2 and 3 only
(d) 2, 3 and 4
| Answer Key |
| (d) |
(Sources: http://www.rbi.org.in, AU Small Finance Bank gets RBI nod to become universal bank)
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