There are particular banks which are regulated by the Reserve Bank of India (RBI). These banks are started with the main motive to serve particular sectors of the society. Though large based banks would also carry out activities, however small banks such as the above would only cater needs to small sections of the society.
These institutions cater to the needs of different forms of customers. Apart from this, the primary activities offered by these types of institutions include providing loans, accepting of deposits and work related to insurance activities. Hence these institutions are formed to provide banking services to the semi-urban and rural sectors of the society.
The primary regulatory authority or body for a small finance bank license is the Reserve Bank of India. Apart from this, the main legislation that governs the establishment of a small finance bank is the Companies Act, 2013 and the Banking Regulation Act, 1949. The Reserve Bank of India Act, 1934 is another banking regulation that governs the activities of this form of institution.
The following are the benefits of securing a small finance bank license in India:
This bank is formed with the main purpose to cater to the needs of consumers of rural and semi urban sectors of the society. Such customers would not get services from large financial institutions in India. Hence they would have to utilise the service provided by these small types of banks.
By securing the small finance bank license, the bank can specialise in carrying out Niche Banking activities in particular areas. These areas include providing loans to small scale industries and other form of household, insurance based services and accepting of deposits from the public.
These banks would cater to the needs of small customers. These customers would not get any form of financing facilities from other large banks and public institutions. Hence customers can utilise the services of a small bank providing above services.
The following are the features of securing this license:
The following criterion is required for starting this form of institution:
In order to form this form of entity it would be crucial for the applicant to have a basic business plan. In the business plan the type of products and services offered must be mentioned. This must meet the requirements of the small business bank business model. Some of the objectives would include providing services to rural and semi urban areas.
Compliance from the RBI must be maintained by this entity. Not only compliance from the RBI, but other forms of compliance must be carried out as per the requirements of the Companies Act, 2013 and Reserve Bank of India Act, 1934. Usually this form of bank is exempted from the requirement of securing an approval from the RBI. However compliance must be maintained by this form of entity.
Usually the promoters and directors have to meet the requirements related to funding of the small business bank. Small business banks would usually provide small time loans between the ranges of Rs. 50,000 to Rs. 1, 25,000.
An entity which is formed under the provision of section 8 of the Companies Act, 2013 is a not for profit company. Such company is usually formed for not for profit activities which are carried out by different forms of societies. The applicant can either form the company as a public limited company with the purpose of making some form of profit or a company which is established for not carrying out any profit driven activities.
If the company wants to be formed as a section 8 company, then the following process or procedure must be followed:
The following procedure must be carried out to start a Small Finance Bank. This process would be if the entity is registered as a private limited company or a public limited company in India:
An applicant wanting to form this form of entity must register the entity as a private limited company or a public limited company. For this requisite process must be carried out by filing documents with the MCA and the ROC.
In the next step, the applicant would have to secure minimum amount of capital for carrying out the operations of this form of entity. The minimum capital that is required for forming this type of entity is Rs. 5 Crore. Such is mandatory to carry out the requirements related to NBFC registration.
In the next step, the applicant has to receive a certificate from the Bank related to no form of lien on the amount of money which is present as the paid up capital for the small finance bank license. The amount of money should be in the form of a fixed deposit and no lien or any hold on the amount which is utilised as the capital for this form of entity.
In the next step, the applicant has to make or file an application with the Reserve Bank of India. The process of making this application is completely online. After this the NBFC would be started as a Small Finance Bank. After this is carried out the company or the entity would receive the CARN (Company Application Reference Number). This number has to be quoted by the applicant for carrying out any form of correspondence with the regulatory authority.
Though the above registration process to form this type of entity is completely online, the applicant also has to file a hard copy of the application for forming this type of entity. Hard copy of the documents as well as all the documents must be filed with the Regional Office of the Reserve Bank of India.
Usually an applicant securing the small finance bank license would operate through the interest rates which are collected on different forms of accounts of customers.
Interest rates which are offered in savings accounts would be around 6 to 8 %.
Interest rates offered in fixed deposit accounts are usually higher which goes to about 9% Different forms of loans are provided by the Small Finance Bank. Through this the company can ensure that all the working capital expenses are recovered.
These banks are classified under the category of non-scheduled banks. Hence they cannot borrow from the RBI (Central Bank). Only scheduled banks are allowed to borrow from the RBI.