All you know about SMALL FINANCE BANK

Hi Bankersdaily Aspirants,

“Good things come to people who wait, but better things come to those  who go out and get them.”

Today we are going to know about Small Finance Bank

A bank is a financial institution licensed to receive deposits and make loans. Banks may also provide financial services, such as wealth management, currency exchange and safe deposit boxes.

Small Finance Bank:

Small Finance Bank can Accept Deposit and Loans to its Customer.

It is similar to normal Commercial Banks but it does everything in much Smaller Scale.

The First Small Finance Bank in India is Capital Small Finance Bank

Objective Of Small Finance Bank:

To bring the unbanked under the ambit of the Banking System

To Provide banking products to the unserved and undeserved sections of the country, which includes small and marginal farmers, micro and small industries, and other organized sector entities, at an affordable cost

Pros of Small Finance Bank:

For deposits, these banks are offering rates that are 100-250 basis points higher than large commercial banks. One basis point is one-hundredth of a percentage point.

It Provides loans to Small and Marginal Farmers as well as people belong to low income  group.

Eligibility Criteria for operating Small Finance Bank:

• Every small finance bank must have the words — small finance bank — in its name.
• They cannot set up subsidiaries to undertake non-banking financial service activities.
• 75% of its Adjusted Net Bank Credit (ANBC) should be advanced to the priority sector as categorized by RBI.
• Maximum loan size to a single person cannot exceed 10% of total capital funds; cannot exceed 15% in the case of a group.
• At least 50% of its loans should constitute loans and advances of up to 25 lakh.
• Small banks can undertake financial services like distribution of mutual fund units, insurance products, pension products, and so on, but not without prior approval from the RBI.
• Small finance banks will be subject to all prudential norms and regulations of the RBI as applicable to existing commercial banks. This will include maintaining cash reserve ratio (CRR) or the percentage of deposits that must be kept aside as a reserve; and statutory liquid ratio (SLR) or the percentage of deposits that must be invested in government securities.
• Minimum paid-up equity capital requirement of Rs 100 crore.
•  The promoter’s minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40% which can be gradually brought down to 26% within 12 years from the date of commencement of operations.
• A small bank can transform into a full-fledged bank, but only after RBI’s approval.
• A fundamental requirement is that it must have 25% of its branches set up in unbanked areas.

Capital adequacy framework:

 Leverage Ratio:

               A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt (loans), or assesses the ability of a company to meet financial obligations.