RBI guidelines on Small Finance Banks, Know what On Tap Licensing means, Current Affairs 2019 #UPSC

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Hello friends and welcome to study iq i am joy see joy and today we will be discussing about the rba that is a reserve bank of india guidelines on small finance banks or sf beasts let us first come to the current affair in the current affair we will see that the rbi the reserve bank of india has recently announced the final guidelines for on tap licensing of

Private sector small finance banks so we will see what is meant by on tap licensing of private sector sf b’s later in this lecture so final guidelines have been given by the rbi for granting of licenses to private sector small finance banks so in this lecture we will be discussing what is the objective of rbi we will discuss briefly about small finance banks and

Its provisions also about the payment banks and how payment banks and arvind cooperative banks can convert themselves into small finance banks we will discuss about the issue of financial inclusion we will also discuss what is member on that licensing system so all these issues we’ll discuss in detail in this lecture very very important topic from all examination

Perspective especially for banking examination upse is eita so let us begin let us begin by understanding waters sfb for two small finance banks what is payment banks also what is on tap licensing system so first coming to sfps that is small finance banks so small finance banks these are banks that offer basic banking services so here the term basic is very

Important now what is meant by basic banking services it is accepting deposits and providing loans so these are the basic banking services so small finance banks they aim at a certain target group in order to provide basic banking services at very reasonable rates so this is the purpose of sfp and by doing that it tries to increase the financial inclusion in the

Country that means more people or more institutions are brought into the formal financial setup in a country so this is the purpose of sfb or small finance gangs so small finance banks they undertake basic banking services including accepting of deposits also ending to underprivileged and underserved sections so that is why it is called small finance banks so who

Is this underprivileged or underserved sections that means those entities small business enterprises small and marginal farmers also msme the micro small and medium entrepreneurs the unorganized sector so these are all des underserved or unserved group this is because they have lesser access to the formal financial institution compared to larger bodies or larger

Industries so that is why they are called underserved now let us come to payment bank now payment bank payment banks on the other hand how it is different from that of small finance banks the payment banks they are not allowed to lend so we have seen that the small finance banks they can undertake all the basic banking activities including lending and accepting

Deposits but payment banks on the other hand they are not allowed to lend according to the present rules and also when we talk about the deposits that can be accepted by the payment banks it is capped at 1 lakh rupees per customer so payment banks have more restrictions in terms of accepting deposits and also lending compared to the small finance banks they are

Not at all allowed to lend whereas the deposit acceptance it is restricted to maximum of 1 lakh rupees so this is the guidelines given by rba now third we will come to what is meant by on tap facility now on tap facility means that the rbi that is the reserve bank of india who is the regulator of the financial system in the country so rbi will accept applications

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And also grant licenses all throughout the year otherwise what happens is that there is a particular season or particular period when rba accepts the proposals or the applications for providing licenses and that licences are also granted at a particular period of time in every year or in certain number of years but on top licensing means at any point of time are

They will accept an application to grant license and at any point of time rbi can even provide the license so this is called on tap facility so these are the three things the small finance banks the payment banks and also the on tap licensing system now let us come to the key guidelines given by rba so first regarding the payment bands so the payment banks they

Can apply for a conversion to a small finance bank we have seen there are certain restrictions in the payment banks like the acceptance of deposit is capped at 1 lakh rupees and there is no provision for lending so if a payment bank wants to convert itself into a small finance bank it is possible and rb has given its guidelines so what are the conditions first

They can convert into small finance banks after 5 years of operation so minimum 5 years they have to complete as a payment month and secondly they have to meet the eligibility criteria now what is the eligibility criteria the eligibility criteria is that the payment bank it functions as a n o f hc that is non operating financial holding company so in that case

They can convert themselves into a small finance bank and the promoter of the payments ban it is eligible to set up an s fb that is small finance bank now coming to the capital of sf b a capital eligibility for a small finance bank earlier the capital requirement for a small finance bank was capped at hundred crore rupee now rp has revised it rb has raised in the

Minimum paid-up capital requirement for s fb to 200 crore from the earlier 100 crore so a double increase has been made by rba this is regarding the capital requirement the total field of capital requirement now about the promoter so the promoter should hold minimum 40 percentage of the paid up voting equity capital for the five years so this is also eligibility

Condition that the promoter of this bank should hold at least 40 percentage of the pain of capital for the initial five years and if the initial promoter shareholding is above 40 percentage it should be brought down to 40 percentage within five years that means if the promoters holding or capital is more than 40 percentage then it should be brought down to 40

Percentage within five years and within 10 years this should be brought out to 30 percentage and within 15 years it should be brought down to 15 year percentage so these are the conditions now regarding scheduled bank status so whether it can become a scheduled bank sheduled commercial gangs so sf b’s that is a small finance banks should be listed within 3 years of

Reaching a network of 500 crore then there is an option that they can be listed as a commercial bank or a scheduled commercial bank so they will be given the scheduled bank stages immediately upon the commencement of the operations and also they will also have general permission to open bank account leads from the date of commencement of the operations now regarding

You cds that is our open cooperative banks so the rbi the reserve bank of india rbi has also allowed the primary urban cooperative banks to convert themselves into sfps so we have discussed about this earlier also so you can find the video that i have prepared on the issue of urban cooperative banks to convert themselves as sfps so the urban cooperative banks if

They want they can convert themselves as sfps or small finance banks and this is provided that if they comply with the guidelines or the licensing guidelines under the on tap licensing requirements so this is the condition and also a minimum net worth of such sf will be hundred crore now this has been increased to 200 crore within 5 years from the commencement

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Of business so this is the key guidelines given by rbi in this regard now let us see what is the rationale of rbi so in the year 2015 in the month of september rb had given in principle approval to ten applicants to set up a small finance bank so ten applicants were given license or granted license in 2015 by rba and now if we look at the status of those ten

Small finance banks we will see that the small finance banks have largely achieved the target of priority sector target status they have become very well in the performance with regard to meeting the priority sector targets they have given loans and they have raised the financial inclusion in the priority sectors we have already seen who are the priority sectors

Who are considered as underserved so that is one reason so it is understood that the sfps or the small finance banks will be better able to meet the targets of the priority sector or the needs and demands of the priority sector with regard to access to finance now second one second reason is that these small finance banks those ten bands that were set up in 2015

They also obtained up their mandate for furthering the financial inclusion so the mandate or the very purpose of small finance dance is to increase the financial inclusion and they also understood the point that these banks have helped in improving the financial inclusion in the economy so this is the second reason and these two reasons put together they make a

Strong case for the entry of new players so first reason the priority sector will have more access to formal finance secondly this also enables and increases the financial inclusion in the economic so considering all these the rbi has thus issued the final guidelines for licensing of such banks throughout the year so we have seen on that licensing system has been

That is throughout the year applications can be given an rba will also grant licenses at any point of time in a year and it is also understood that the small finance banks they have the potential to provide an alternative to some of the existing institutions and it can also contribute to increasing financial inclusion also serving a variety of needs of unserved or

Underserved clients for example the priority sectors etc especially in the rural area or semi urban areas so this is the rationale of rbi now coming to the benefits so what could be the benefits if more number of sf beasts or the small finance banks come up in the economic first one if the payment banks e they get the late license of a small finance bank then they

Will have access to more deposits we have seen that the payments bank so these banks have restricted eligibility for accepting deposits that is their deposit acceptance cap is limited to 1 lakh rupees so if the payment banks if they convert themselves into small finance banks then they will also have more access to more deposits so this is the second one sorry first

Reason second one this will boost the profitability now right now the payments bank the profitability of the payments banks are in pressure we have seen that many payment banks they have concluded their business they have minded up and this shows that there is lesser profitability in the payment banks one reason is that they can accept like some deposits whereas

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They have no option of lending and this makes them very much vulnerable to market risk and also losses so the profitability of the payments bank have come down considerably and if the payment banks they are able to convert themselves into small finance banks it is sure that they will be able to get more profit and expand their business so as they expanded this the

Financial inclusion in the economy will improve also the digitalization of economic will be easier this is because payments bank provides a wide variety of services in the economic so definitely the profitability margins and the financial inclusion will increase and the economy will move into a digitalization so this is the thing now another thing is the return on

Equity are only so other initial years it is expected that the return on equity will reduce but subsequently it will increase now what does roi return on equity it is a measure of profitability of a business so it is a measurement of profitability how much profit a business has earned and this is calculated by dividing the net income net income of a company divided

By shareholders equity so this is the calculation of roi or return on equity now let us come to the scope of nbf ceased now since our way has given these guidelines it will be easy for the nbf see also to explore the sfb models onbfc scan also a dr. sfb model and why this is more important now this is because there is a liquidity crisis or a liquidity crunch in the

Ndf sea sector after the il and fs crisis so the nbf sees the non banking financial companies can also explore this sfb model so all these put together we can expect a better response to the sfb licenses and the point that this licensing system it’s an on tack licensing system again it makes more advantageous raises because the licensing is on an on tap basis this

Means that nbf sees the non banking financial companies they can finalize their business plans organization structure systems and processes before they apply for a license and ensure they will get a better success rate since this is a non tap system and better planning and implementation can be done therefore better success rate can also be ensured and also another

Impact could be that the small finance bang they will occupy the space that is now occupied by some bigger bands so the small finance banks will become capable of occupying the space of the bigger banks now and this will ensure that the marginal section in underprivileged are getting more access to financial services and also credit now what about the success

Now the success of this sfps it will largely depend upon the quality of the asset now for a bank the asset is the loans given by the bank so the quality of the asset will be the prime determinant of the success rate of this small finance banks and second factor would be the test that they gain from the public and third one would be the standards of governance and

The regulations so what happened with public sector banks it was governance issues or systemic issues that led to higher percentage of nps so it will all depend on governance regulation and the policy that the bank’s under tape which will determine that success rate so these are the factors that will determine their success rate and you can find the pdf of this

Lecture on our website www.sceeto.com you can follow my facebook page for more video updates you can write to me at joy cdot straddie iq at gmail.com for any of your queries and clarification thank you

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RBI guidelines on Small Finance Banks, Know what On Tap Licensing means, Current Affairs 2019 #UPSC By StudyIQ IAS