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Eligibility for Small Finance Banks to do Authorised Dealer-I Business

Raghvendra Sonker

| Updated: Aug 18, 2022 | Category: RBI Registration

Eligibility for Small Finance Banks

The Government of India regularly issues guidelines to facilitate the business of forex exchange transactions to the residents and non-residents visiting India. The transaction for sale or purchase of foreign exchange is done through the authorised dealer banks.A recent circular (CIRCULAR NO. RBI/2022-23/104 DOR.LIC.REC.60/16.13.218/2022-23) released by the central bank will allow the Small Finance Banks to offer a wide range of forex services to their clients. The RBI has allowed Small Finance Banks to function as the Authorised Dealer Category – 1 bank, subject to compliance with eligibility criteria.

Who are Authorised Dealers?

The authorised dealer means any financial institution that has received permission from the Reserve Bank of India to trade and deal in foreign currencies to facilitate the conversion of foreign denominations. Authorised Dealers are nothing but the authorised money changer. The Authorised dealers are categorised into two:

  • Authorised Dealer Category –I

All Scheduled Banks and Commercial Banks registered under RBI Act, 1934[1] are qualified to operate as Authorised Dealer Category-I. These banks generally deal in capital and current account transactions per the rules prescribed by the RBI. The RBI also approved Urban Co-operative Banks to act as Authorised Dealer Category- I.

  • Authorised Dealer Category-II

The institutes under this category operate in a restrictive environment for implementing norms prescribed by RBI. Category – II Authorised Dealer Banks are only allowed to perform the Full Fledged Money Changer (FFMCs)activities for the client’s requirements. Various types of NBFCs are also considered as Authorised Dealer Category-II. These institution deals in non-trade activities like transaction of foreign exchange (conversion of currency denomination).

  • Authorised Dealer Category –III

Financial Institutes such as EXIM Banks, Small Industrial Development Bank of India (SIDBI), IFCI, Clearing Corporation of India etc. They are authorised to facilitate finances for international trade and similar related activities.

What are FFMCs?

The Full Fledged Money Changer is the entity authorised to buy foreign exchange from residents and non-residents and to sell foreign exchange for an authorised purpose. The main objective of formulating FFMCs is to provide easy access to foreign exchange transactions.

Why is there a need to become an Authorised Dealer Category-I?

The Reserve Bank of India has released a circular with respect to the Authorised Dealer Category- I eligibility for Small Finance Banks with an objective to provide more flexibility to Small Finance Banks to meet the foreign exchange business requirements of customers. All eligible Small Finance Banks can avail Authorised Dealer Category-I Licence with subject to the compliance with the prescribed eligibility norms and may approach Foreign exchange Department, RBI with the application and documents mentioned in the RBI’s circular.

Eligibility for Small Finance Banks to do Authorised Dealer Category-I Business

The circular released by the Reserve Bank of India prescribes certain requirements for Small Finance Banks (Authorised Category- II) to become Authorised Dealer Category-II. The following eligibility for small finance banks are:

Operations:  The Small Finance Bank working as an Authorised Dealer Category-II should have completed at least 2 years of operations.

Second Schedule:Small Finance Bank should have been qualified to be included in the Second Schedule of the RBI Act, 1934. The second schedule comprises a list of all the scheduled commercial banks. Banks under the second schedule of the RBI Act, 1934 are authorised to borrow funds from the central bank.

Capital Requirements: A minimum net worth of Rs. 500 Crore

Net NPAs: The Net Non-Performing Assets of the Small Finance Banks should not exceed 6% preceding four quarters.

Profit: An Authorised Dealer Category- II should have generated profits in the last two years.

Internal Control: Small Finance Banks should have an internal control mechanism placed all the time.

CRR/SLR:It should have maintained the minimum requirements of Cash reserve ratio and Statutory Lending Ratio preceding two years. 

Regulatory Concerns:Authorised Dealer Category-II banks should not have major regulatory and statutory concerns.

Documents required for Authorised Dealer Category –I

The application shall be submitted along with a list of documents that must be furnished before the Foreign Exchange Department, Reserve Bank of India. The following list is stated below:

  • A copy of the banking licence issued by the Resave Bank of India shall be submitted. 
  • An approved Board Resolution for performing the activities permitted of an Authorised dealer Category-I
  • A certified Board Resolution for obtaining the authorisation/approval from the RBI under Section 10(1) of the Foreign Exchange Management of India 1999.

Conclusion

Authorised Dealers Category-I, Authorised Dealers Category-I and FFMCs are authorised by the Reserve Bank of India to deal in Foreign Exchange Transactions for authorised purposes. The central government regularly updates and widens the access of foreign exchange facilities to its residents and non-residents and ensures efficient customer services.    

Read our Article: Guiding Principle for Licensing of Small Finance Banks

Raghvendra Sonker

Raghvendra Sonker has completed his Graduation from Gujarat National Law University. He has a keen interest in legal drafting, writing articles, and research papers. His core interest areas are Banking and Financial Issues.

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