Source: FE
Context:
Non-Banking Finance Company (NBFC) Purple Finance, founded in 2021, has announced its ambition to secure a Small Finance Bank (SFB) license by 2028. The company has rapidly expanded across multiple states, focusing on financial inclusion and small-town credit access.
Company Overview:
- Net Worth: Exceeds ₹100 crore
- Founded: 2021 by four entrepreneurs
- Presence: 44 branches across seven states — including Maharashtra, Madhya Pradesh, and Uttar Pradesh
RBI Criteria for Setting Up a Small Finance Bank (SFB)
Reserve Bank of India (RBI) – as per the Guidelines for Licensing of Small Finance Banks in the Private Sector (2019), under the Banking Regulation Act, 1949.
Objective of SFBs
Small Finance Banks are established to:
- Promote financial inclusion by providing credit access to unserved and underserved sections.
- Serve small business units, marginal farmers, micro and small industries, and unorganised sector entities.
- Encourage savings habits among rural and semi-urban populations.
Eligible Promoters
- Resident individuals / professionals with at least 10 years’ experience in banking and finance.
- Companies or societies owned and controlled by residents.
- Existing NBFCs, MFIs, and Local Area Banks (LABs) are also eligible to apply.
- Joint ventures not allowed; only one promoter group permitted.
- Fit and proper criteria: The promoter must have a clean track record and meet RBI’s fit and proper norms.
Minimum Capital Requirement
- Paid-up Capital: ₹200 crore (revised upward from ₹100 crore).
- Promoter’s Initial Contribution: Minimum 40% of paid-up capital, to be locked in for 5 years.
- To be reduced to 26% within 12 years from the date of commencement.
Promoter Contribution & Lock-in
- Initial promoter shareholding: Minimum 40% for first 5 years.
- Gradual dilution:
- To 30% within 10 years,
- To 26% within 12 years of operation.
- No single shareholder (other than the promoter) can hold more than 10%.
Scope of Activities
SFBs can:
- Accept deposits, including savings and recurring deposits.
- Provide loans and advances to small borrowers.
- Offer foreign exchange services, mutual fund distribution, and insurance products (subject to RBI approval).
- Not allowed to set up subsidiaries for non-banking financial services.
Prudential Norms
- Must comply with CRR and SLR requirements like other commercial banks.
- Priority Sector Lending (PSL):
- At least 75% of Adjusted Net Bank Credit (ANBC) must go to priority sectors.
- Loan Size Limits:
- Maximum 10% of total loans to a single borrower.
- Maximum 15% of capital funds to a group of connected borrowers.
Financial Inclusion Mandate
- At least 25% of branches must be opened in unbanked rural centres.
- Focus must remain on small-ticket loans, including micro and agricultural lending.
Governance and Listing
- Must be registered as a public limited company under the Companies Act, 2013.
- Listing Requirement:
- Mandatory listing on stock exchange within 3 years of net worth reaching ₹500 crore.
Transition from NBFC to SFB
For existing NBFCs (like Purple Finance) applying for an SFB license:
- Must meet fit and proper criteria, capital adequacy, and net worth requirements.
- Must submit a transition plan to convert into an SFB, including proposed restructuring and compliance roadmap.
- RBI conducts on-site and off-site due diligence before granting the license.
