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Draft Guidelines for On Tap Licensing of Small Finance Banks in India - Time to get ready

Reserve Bank of India has shared draft guidelines for "On Tap" Licensing of Small Finance Banks in the Private Sector on 13th Sept 2019. As of now, SFB appears to be the only way to become a bank in the country as RBI is no longer issuing Payment Bank License as well as Universal Bank License. As per the current understanding, only successful Small Finance Banks would become eligible for Universal Banks after five years of satisfactory track record along with other requirements around Paid up Capital.

Who can apply for SFB license?

  • Indian professionals with 10 years of experience in banking and finance
  • Private companies
  • NBFCs
  • MFIs
  • Local Area Banks (just 3 are in this group)
  • Urban Cooperative Banks

Capital Required

  • 200 crores (except for Urban Cooperative Banks)

Interestingly, with Open Banks / Challenger Banks in India raising 50 million plus, this may not be such a large amount for setting up a full scale bank.

What can SFBs do?

  • Deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
  • Distribution of MF / Insurance / Pension products
    • This needs RBI permission. One of the SFB, missed this guideline for distributing third party products and got penalized.
  • Become Category II Authorised Deals in Forex
  • Open branches wherever they want with at least 25 per cent of its banking outlets in unbanked rural centers (population upto 9,999).

Preferred locations for setting up SFB

  • North East / East / Central India

Lending focus:

  • 75% Priority Sector Lending
  • Max loan size and investment limit to single and group would be restricted to 10% and 15% of capital
    • A bank in India missed this guidelines recently, which has impacted millions of Indian now.
  • 50% portfolio with upto Rs 25 lakh of loans

Small Finance Bank cannot be a Business Correspondent (BC) for another bank. However, they can have other entities as BCs.

Technology and Digital Focus:

"The operations of the bank should be technology driven from the beginning, conforming to generally accepted standards and norms; while new approaches (such as for data storage, security and real time data updation) are encouraged, a detailed technology plan for the same should be furnished to RBI"

Given the size of loans / deposits would remain low per customer, this may be the biggest driver for scale at low cost for Small Finance Banks. New banks have the opportunity to build differentiated model using technology with:

  • 80% lower cost of acquisition through Digital Onboarding Process
  • Faster acquisition through Digital BCs running over powerful APIs
  • 80% lower cost of operations in comparison to the market and build Fintech like model

Some of the current small finance banks have not been able to utilize Digital / Technology due to lack of focus during the initial journey. These banks face daunting task of competing with Digital / Fintech savvy banks without enough armoury.


"The validity of the ‘in-principle approval’ issued by RBI will be 18 months from the date of granting ‘in-principle approval’ and would thereafter lapse automatically. Therefore, the -applicant will have to obtain the license within a period of 18 months of granting the ‘in-principle approval'."

Personally, I have been involved in setting up a private sector bank as well as PSU bank in India and both the times, we have been able to build the bank in record time. Sense of purpose and energy required for setting up a bank is way higher than anything else I have seen in my life.

As industry gets ready for applying for the most powerful license in the country, my suggestion is to get everything ready from business model to digital strategy to technology strategy to hiring plans right now. When the final guidelines will come, there may not be enough time to prepare for the same.

To make it even more challenging:

An applicant who has not been found suitable for issue of license will be advised of the Reserve Bank’s decision. Such applicants will not be eligible to make an application for a banking license for a period of three years from the date of that decision.

If we miss the bus now, the next chance would be many years away.



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