Source: BS
Context:
Fino Payments Bank Ltd. has received ‘in-principle’ approval from the Reserve Bank of India (RBI) to convert into a Small Finance Bank (SFB).
First Payments Bank to Secure SFB Conversion Nod
- Fino becomes the first-ever payments bank in India to receive in-principle approval for SFB transformation.
- Eligibility achieved after completing the mandatory five years of operations, as required under RBI’s on-tap licensing guidelines.
- Fino launched its payments bank services in 2017 (though it originally started as a payments technology company in 2006).
- Fino had applied for the SFB license in October–December 2023; the approval came nearly two years later.
- Important: This in-principle approval does NOT immediately make Fino an SFB. The bank must complete all regulatory requirements within a stipulated timeline of 18 months before RBI issues the final license.
Fino’s Track Record
- Became the first profitable payments bank in 2020.
- Became the first payments bank to be listed on stock exchanges in 2021.
- Played a key role in India’s financial inclusion journey, delivering Direct Benefit Transfer (DBT) services to beneficiaries.
What Conversion to SFB Will Enable
After full authorization, Fino will be able to:
- Accept higher-value deposits without the ₹2 lakh per-customer limit applicable to payments banks.
- Start lending activities to individuals, MSMEs, and small businesses.
- Offer loans such as microcredit, agri-loans, business loans, and retail loans.
- Expand its branch network (with 25% mandatorily in unbanked rural centres).
- Operate like mainstream commercial banks but with a focus on underserved segments.
Eligibility to Become a Small Finance Bank (SFB)
Per RBI’s on-tap licensing guidelines (originally 2014, revised 2019, further updated as the RBI (Small Finance Banks – Licensing) Guidelines, 2025):
1. Eligible Entities
- Existing Payments Banks, NBFCs, Microfinance Institutions (MFIs), Local Area Banks (LABs), and other resident-owned entities.
- Resident individuals/professionals with at least 10 years of senior-level experience in banking and finance.
- The applicant must be promoted by residents (Indian citizens/companies controlled by residents).
2. Operations & Compliance Track Record
- Payments banks must complete a minimum of 5 years of operations.
- Must show sound financials, a viable profitability path, and a clean compliance history.
3. Capital Requirements
- Minimum paid-up voting equity capital / net worth: ₹200 crore (₹100 crore initially for UCBs transitioning, to be raised to ₹200 crore within 5 years).
- Promoter contribution: at least 40% of paid-up capital, locked in for 5 years, to be progressively diluted to 26% within 12 years.
- Minimum Capital Adequacy Ratio (CRAR) of 15% of risk-weighted assets on a continuous basis (Tier I capital at least 7.5% of RWAs).
4. Foreign Shareholding
- Governed by the FDI policy for private sector banks.
- Aggregate FDI permitted up to 74% of paid-up capital — up to 49% via the automatic route, and beyond 49% up to 74% via the government/RBI approval route.
- At least 26% of paid-up capital must be held by residents at all times.
5. Priority Sector & Financial Inclusion Focus (Revised Norms
- The overall PSL target has been reduced from 75% to 60% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposures (CEOBE), whichever is higher.
- 40% of ANBC/CEOBE must continue to be allocated to specified PSL sub-sectors (agriculture, MSMEs, education, housing, weaker sections) as per extant RBI prescriptions — this remains unchanged.
- The flexible/discretionary component has been reduced from 35% to 20%, to be deployed across any PSL sub-sectors where the SFB has competitive advantage.
- At least 50% of the loan portfolio must consist of advances up to ₹25 lakh ticket size (unchanged).
6. Branch Expansion Rules
- At least 25% of branches must be located in unbanked rural centres.
7. Other Key Conditions
- Maximum single/group obligor exposure restricted to 10%/15% of capital funds.
- SFBs are granted scheduled bank status immediately upon commencement of operations.
- Listing on stock exchanges is mandatory within 8 years of commencing operations.
- SFBs are subject to all prudential norms (CRR, SLR, etc.) applicable to commercial banks, with no regulatory forbearance.
