The Reserve Bank of India (RBI) last came out with an established of guidelines for licensing of fresh small finance banks in the remote division on February 22, 2013. The process of licensing culminated through the proclamation by the RBI vide its Press Release dated April 2, 2014, that it would grant “in-principle” approval to two applicants who would set up new banks in the private sector within a historical of 18 months. Guidelines for Small Finance Banks \t Registration, licensing and regulations The Small Finance Banks shall be registered as a public limited company under the Companies Act, 2013. It determination be licensed under Section 22 of the Banking Regulation Act, 1949 and governed by the provisions of the Banking Regulation Act, 1949; Reserve Bank of India Act, 1934; Foreign Exchange Management Act, 1999; Payment and Settlement Organizations Act, 2007; Credit Information Companies (Regulation) Act, 2005; Deposit Insurance and Credit Guarantee Corporation Act, 1961; other relevant Statutes and the Directives, Sensible Regulations and other Guidelines/Commands issued by RBI and other regulators from time to time. \t Eligible promoters Resident individuals/professionals with 10 years of experience in banking and finance; and Companies and Societies owned and controlled by residents will be eligible as organizers to customary up small finance banks. Promoter / Promoter Groups as distinct in the SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2009 should be ‘right plus proper’ in instruction to be good to organizer insignificant economics banks. RBI would assess the ‘right plus proper’ status of the candidates on the foundation of their past highest of sound authorizations and integrity; financial soundness and popular track greatest of specialized experience or of consecutively their productions, etc. for at minimum a historical of five years. \t Scope of activities The small finance bank, in the conservation of the ideas for which it is set up, shall principally commence undeveloped banking activities of acceptance of deposits and lending to unserved and underserved units including small business units, small and bordering farmers, micro and small industries and unorganized sector entities. With the prior approval of the RBI and after complying with the necessities of the sectoral regulator for such products. The small business bank can also develop a Category II Authorised Broker in foreign conversation job-related for its clients’ requirements. There will not be any constraint in the area of operations of small finance banks; however, preference will be given to those applicants who in the initial phase set up the bank in a cluster of under-banked States/districts, such as in the North-East, East and Central regions of the country. These applicants will not have any hindrance to expanding to other regions in outstanding progression. It is predictable that the small finance bank should mostly be reactive to local needs. The other financial and non-financial facilities happenings of the managers, if any, should be kept distinctly ring-fenced and not comingled with the banking business. \t Capital requirement The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore. Tier II capital should be limited to a maximum of 100 percent of total Tier I capital. As small finance banks are not expected to deal with cultured products, the capital adequacy ratio will be calculated under Basel Committee’s standardized approaches. \t Promoter's contribution The promoter's lowest initial involvement to the paid-up equity principal of such small finance bank shall at smallest be 40 percent. If the initial shareholding by the promoter in the bank is in excess of 40 percent, it should be brought down to 40 percent within a period of five years. The promoter's minimum contribution of 40 percent of paid-up equity capital shall be locked in for a period of five years from the date of commencement of business of the bank. Further, the promoter’s post should be transported depressed to 30 percent of the paid-up equity capital of the series within a period of 10 years, and to 26 percent within 12 years from the date of commencement of business of the bank. \t Foreign shareholding The external shareholding in the small economics bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time. As per the current FDI policy, the aggregate foreign investment in a private sector bank from all sources will be allowed up to a maximum of 74 percent of the paid-up capital of the bank (programmed up to 49 percent and approval route outside 49 percent to 74 percent). At all times, at least 26 percent of the paid-up capital will have to be held by residents. In the case of Foreign Institutional Investors (FIIs) / Foreign Portfolio Investors (FPIs), individual FII / FPI holding is restricted to below 10 percent of the total paid-up capital, aggregate limit for all FIIs /FPIs / Qualified Foreign Investors (QFIs) cannot exceed 24 percent of the total paid-up capital, which can be raised to 49 percent of the total paid-up capital by the bank concerned through a determination by its Board of Directors tracked by a special resolution to that consequence by its All-purpose Body. NRIs, case the individual holding is restricted to 5 percent of the total paid-up capital both on repatriation and non-repatriation basis and the aggregate limit cannot exceed 10 percent of the total paid-up capital both on deportation and non-deportation basis. However, Non-Resident Indian (NRI) holding can be allowed up to 24 percent of the total paid-up capital both on deportation and non-deportation basis provided the banking company passes a special resolution to that effect in the General Body. \t Additional conditions for NBFCs/MFIs/LABs converting into a small bank An existing NBFC/MFI/LAB, if it meets the conditions under these guidelines, could apply to convert itself into a small finance bank, after complying with all legal and approval requirements from various authorities. In such a case, the entity shall have a minimum net worth of Rs. 100 crores or it shall infuse additional paid-up equity capital to achieve a net worth of Rs. 100 crore. It may be noted that on translation into a small finance bank, the NBFC / MFI will cease to exist and all its business which a bank can undertake should fold into the series and the happenings which a bank cannot statutorily undertake to be divested/disposed of. Further, the branches of the NBFC / MFI should either be converted into bank branches or be merged/closed as per the business plan. The small finance bank and the NBFC / MFI cannot co-exist. \t Business plan The applicants for small economics bank licenses will be compulsory to deliver their business strategies along with project reports with their tenders. The business plan will have to address how the bank proposes to achieve the objectives behind setting up of small finance banks and in the case of an NBFC / MFI applicant, how the existing business of NBFC / MFI will fold into the bank or divested/disposed of. The business plan submitted by the applicant should be realistic and viable. In case of abnormality from the definite commercial plan after a matter of license, RBI may consider restricting the bank’s expansion, effecting change in management and imposing other penal measures as may be necessary. \t Corporate governance The Board of the small finance bank should have a majority of independent Directors. The bank should conform to the corporate governance guidelines counting ‘right plus proper’ criteria for Directors as issued by RBI from time to time. It is most required to follow the RBI guidelines on a word to word format as it is a regulatory body for such business activities and has to be followed as the principle of business.