Purple Finance Targets Small Finance Bank License

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):
  • SFBs must allocate at least 60% of their ANBC (or Credit Equivalent of Off-Balance Sheet Exposures, whichever is higher) 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.