I85PREP
⌘ K
IIBF SFB study materials
IIBF SFB study resources

IIBF SFB: Regulatory Framework and Licensing of Small Finance Banks

IIBF SFB · Work through your exam, one topic at a time.

All guide sections

Regulatory Framework and Licensing of Small Finance Banks

What the exam tests

SFB licensing sits at the junction of the Companies Act, 2013, the Banking Regulation Act (BR Act), 1949 and RBI policy. Expect questions on entry capital, promoter shareholding and lock-in, permitted versus prohibited activity, the listing trigger and conversion into a universal bank.

The core rules

  • Two licensing windows: the 27 November 2014 guidelines (minimum paid-up capital Rs 100 crore) and the on-tap framework of 5 December 2019 (minimum paid-up capital Rs 200 crore, applications screened by an External Advisory Committee, with RBI deciding).
  • The entity must be a public limited company, licensed under Section 22 of the BR Act, 1949, carrying "small finance bank" in its name; on meeting the Second Schedule tests it becomes a scheduled bank.
  • Promoter contribution: minimum 40% of paid-up capital, locked in for five years, to be brought down to 26% within 12 years of commencement of business.
  • Business: accepting deposits and lending to small business units, small and marginal farmers, micro and small industries and unorganised sector entities. An SFB cannot act as business correspondent for another bank; para-banking such as mutual fund or insurance distribution needs prior RBI approval.
  • Listing is mandatory within three years of net worth reaching Rs 500 crore.
  • Conversion to a universal bank: at least five years of satisfactory performance, listed status, net worth of Rs 1,000 crore, and GNPA/NNPA within 3%/1% in the preceding two years.

Worked example

An SFB starts with paid-up capital of Rs 200 crore. Promoter holding must be at least Rs 80 crore (40%) at inception, locked for five years, and no more than Rs 52 crore (26%) after 12 years. If capital is later raised to Rs 400 crore, the 26% ceiling becomes Rs 104 crore: the test is a percentage, not a fixed rupee cap.

Marks-losing traps

Using Rs 100 crore as entry capital under the current on-tap route; quoting 26% instead of 40% for initial promoter holding; assuming free distribution of third-party insurance or mutual funds; forgetting the Rs 500 crore net worth trigger for listing.