RBI/2016-17/81
DBR.NBD.No.26/16.13.218/2016-17
October
6, 2016
Chief Executive Officers of
Small Finance Banks
Madam / Dear Sir,
Operating Guidelines for Small
Finance Banks
Please refer to the Guidelines for Licensing of Small Finance Banks
(‘Licensing Guidelines’) dated November 27, 2014, under which
in-principle approvals / licences were issued to the applicants for setting
up of the small finance banks.
2. The need for separate
Operating Guidelines for small finance banks was examined, considering the
differentiated nature of business and financial inclusion focus of these
banks. Accordingly, the Operating Guidelines for small finance banks are
given in the Annex.
3. The prudential frameworks for
market risk and operational risk are being examined and the instructions in
this regard will be issued separately.
4. These Operating Guidelines
are supplementary to the Licensing Guidelines and take immediate effect.
Yours faithfully,
(S S Barik)
Chief General Manager-in-Charge
Annex
Operating
Guidelines for Small Finance Banks
1. Prudential regulation
The prudential regulatory
framework for the small finance banks (SFBs) will largely be drawn from the
Basel standards. However, given the financial inclusion focus of these
banks, it will be suitably calibrated.
1.1 Capital adequacy framework
Minimum Capital Requirement
|
15%
|
Common Equity Tier 1
|
6%
|
Additional Tier I
|
1.5%
|
Minimum Tier I capital
|
7.5%
|
Tier 2 capital
|
7.5%
|
Capital Conservation Buffer
|
Not Applicable
|
Counter-cyclical capital
buffer
|
Not applicable
|
Pre-specified Trigger for
conversion of AT1
|
CET1 at 6% up to March 31, 2019, and 7% thereafter
|
1.2 Leverage Ratio
Leverage Ratio
|
4.5%
|
Calculated as percentage of
Tier I capital to Total Exposure
|
1.3 Liquidity Coverage Ratio and
Net Stable Funding Ratio
LCR, as applicable to scheduled
commercial banks, will be applicable to small finance banks. The transition
period for the SFBs for achieving the prescribed level of LCR would be as
follows:
|
Till
Dec. 31, 2017
|
By
Jan 1, 2018
|
By
Jan 1, 2019
|
By
Jan 1, 2020
|
By
Jan 1, 2021
|
Min LCR
|
60%
|
70%
|
80%
|
90%
|
100%
|
NSFR will be applicable to small
finance banks on par with scheduled commercial banks as and when finalised.
1.4 Capital measurement
approaches
Credit Risk
|
Basel II Standardized Approach
for credit risk. In this connection, it is clarified that the use of
external rating based risk weight for rated exposure and regulatory
retail approach for small retail loans is permitted.
|
1.5 Inter-bank borrowings
SFBs will be allowed exemption
from the existing regulatory ceiling on inter-bank borrowings till the
existing loans mature or up to three years, whichever is earlier.
Afterwards, it will be on par with scheduled commercial banks. In this
context, it is clarified that the borrowings made by the SFB after the
commencement of operations will be subject to inter-bank borrowing limits.
The above exemption is only applicable to the legacy borrowings that are
migrated to the opening balance sheet of the SFB on the day of commencement
of operations.
1.6 Investment classification
and valuation norms
The extant provisions in this
regard as applicable to scheduled commercial banks (see the Master Circular RBI/2015-16/97 DBR No
BP.BC.6/21.04.141/2015-16 dated July 1, 2015 and circulars
issued thereafter) shall be applicable to SFBs as well.
1.7 Restrictions on loans and
advances (including lending to NBFCs) including regulatory limits
The extant provisions in this
regard as applicable to scheduled commercial banks (see the Master Circulars RBI/2015-16/95
DBR.No.Dir.BC.10/13.03.00/2015-16 and RBI/2015-16/36
DBR.BP.BC.No.5/21.04.172/2015-16 dated July 1, 2015 and
circulars issued thereafter) shall be applicable to SFBs as well.
1.8 Income recognition, asset
classification and provisioning norms on advances including that for
restructuring of credit facilities
The extant provisions in this
regard as applicable to scheduled commercial banks (see the Master Circular RBI/2015-16/101
DBR.No.BP.BC.2/21.04.048/2015-16 dated July 1, 2015 and
circulars issued thereafter) shall be applicable to SFBs as well.
1.9 Credit risk transfer and
portfolio sales/purchases: Securitisation, assignment and direct sale of
loan portfolios, sale of NPAs, guarantees, LCs, SBLCs, co-acceptances,
credit derivatives and inter-bank participation certificates, take-out
finance
i.
SFBs
will be permitted to participate in securitization market only as
originators and providers of associated credit enhancements and liquidity
supports.
ii.
Other
credit risk transfer transactions as below will be allowed for SFBs:
Acquiring
credit risk
|
Permissibility
|
Transferring
credit risk
|
Permissibility
|
Purchase of portfolios of
loans classified as standard assets
|
Permitted only from banks and
NBFCs for the specific purpose of meeting the sub-targets within the 40%
PSL target as applicable to commercial banks.
|
Sale of individual
loans/portfolios of loans classified as standard assets
|
Permitted
|
Purchase of NPAs
|
Not Permitted
|
Sale of NPAs
|
Permitted
|
Issuing bank guarantees
/LCs/SLBCs/co-acceptances
|
Permitted
|
Receiving bank
guarantees/LCs/SLBCs/co-acceptances
|
Permitted
|
Investing in inter-bank
participation certificates and PSL Certificates
|
Permitted for the specific
purpose of meeting the sub-targets within the 40% PSL target as
applicable to commercial banks.
|
Issuing inter-bank
participation certificates and PSL certificates
|
Permitted
|
Investing in credit
derivatives
|
Not permitted
|
Issuing credit derivatives
|
Not permitted
|
Taking out of loans of other
banks by the SFBs
|
Not permitted
|
Taking out of SFBs loans by
the banks and term lending institutions
|
Permitted
|
In this connection, it is
clarified that if the customer who has availed of a loan from any bank
desires to shift his/her loan to a SFB, the same will be permitted.
1.10 Para-banking activities
(i) SFBs will not be permitted
to undertake any para-banking activity except that allowed as per the
Licensing Guidelines and the related FAQs issued.
(ii) SFBs will be permitted to
use Interest Rate Futures (IRF) for the purpose of proprietary hedging.
Further, as regards the foreign exchange business, SFBs would be permitted
to use derivatives for proprietary hedging only, as applicable to AD
Category II licence holder. Also, any forward cover taken on existing
External Commercial Borrowings (ECBs) would be permitted to be
grandfathered. No other derivatives and structured products will be allowed
for SFBs.
2. Risk management
As the risks and risk management
techniques for SFBs will be on par with the scheduled commercial banks, the
extant provisions in this regard as applicable to scheduled commercial
banks, shall be applicable to SFBs as well.
3. CRR, SLR, disclosures and
statutory/regulatory reports
The extant provisions in this
regard as applicable to scheduled commercial banks (see the Master Circular RBI/2015-16/98
DBR.No.Ret.BC.24/12.01.001/2015-16 dated July 1, 2015 and
circulars issued thereafter) shall be applicable to SFBs as well.
4. Ownership and control
regulations
The extant provisions in this
regard as applicable to private sector banks, as covered in the Master
Directions on Issue and Pricing of shares by Private Sector Banks DBR.PSBD.No.95/16.13.100/2015-16 dated April 21, 2016 and
Master Directions on Ownership in Private Sector BanksDBR.PSBD.No.97/16.13.100/2015-16 dated May 12, 2016,
shall be applicable to SFBs as well except what is provided in the existing
regulation contained in the Licensing Guidelines.
5. Corporate governance
5.1 Constitution and functioning
of board of directors
The extant provisions as
applicable to banking companies shall be applicable to SFBs as well.
Specifically in the case of converting entities, the existing terms and
conditions of appointment of Directors will be grandfathered till
completion of their present term.
5.2 Constitution and functioning
of committees of the board, management level committees, remuneration
policies
The extant provisions in this
regard as applicable to private sector banks, shall be applicable to SFBs
as well.
6. Banking Operations
6.1 Branch authorization policy
(i) SFBs should follow the
extant instructions pertaining to the branch authorization policy as
applicable to scheduled commercial banks (see the Master Circular RBI/2014-15/77 DBOD. No. BAPD.BC.
7/22.01.001/2014-15 dated July 1, 2014 and circulars issued
thereafter) in all respects.
(ii) SFBs are required to have
25% of their branches in unbanked rural centres within one year from the
date of commencement of operations.
6.2 Regulation of Business
Correspondents
(i) The SFBs may engage all
permitted entities including the companies owned by their business partners
and own group companies on an arm’s length basis as “BCs”. These companies
can have their own branches managed by their employees operating as “access
points” or may engage other entities/persons to manage the “access points”
which could be managed by the latter’s staff.
(ii) In the above cases, from
the regulatory perspective, the bank will be responsible for the business
carried out at the ‘access points’ and the conduct of all the parties in
the chain regardless of the organizational structure including any other
intermediaries inserted in the chain to manage the BC network.
(iii) Inter-operability of the
BCs will be allowed except for opening of deposit accounts
(iv) Offline BCs will not be
allowed; that is, BCs who would be doing online transactions/using PoS
terminals for transactions only will be allowed.
(v) The SFBs will be exempted
from the requirement of having a base branch for a certain number of
BCs/access points managed by BCs as currently stipulated in the RBI
guidelines to scheduled commercial banks.
6.3 Bank charges, lockers,
nominations, facilities to disabled persons, etc.
The extant provisions as
applicable to scheduled commercial banks shall be applicable to SFBs as
well.
6.4 Marginal Cost of Funds based
Lending Rate (MCLR), other related regulations on interest rates and fair
practice code for lenders
The extant provisions as
applicable to scheduled commercial banks shall be applicable to SFBs as
well.
6.5 Financial inclusion and
development
(i) SFBs are encouraged to lend
to SHGs.
(ii) The provisions in Paragraph
10 of the Licensing Guidelines pertaining to grandfathering of borrowings
will apply to cases where existing NBFCs/MFIs set up a small finance bank
(SFB) and transfer its business to the SFB as well, apart from conversion
cases. In this context, the applicants may approach RBI separately with the
details of liabilities to be grandfathered, after obtaining the final
banking licence, so that the additional capital charge to be imposed can be
finalised.
(iii) The lending banks will be
permitted to avail the priority sector lending (PSL) classification for the
loans made to such NBFCs, as long as the assets financed out of such loans
are PSL eligible assets. This dispensation to the lending banks would be
extended only up to the extent of actual outstanding balance supported by
existing underlying assets as on the opening balance sheet of the SFB, and
only till repayment of underlying loans.
(iv) The assets financed out of
the above loans from the banks would not be reckoned for the ‘Adjusted Net
Bank Credit (ANBC)’ for priority sector calculation for the SFB, to the
extent the lending bank enjoys PSL status on such grandfathered loans.
(v) Any fresh assets created out
of such outstanding grandfathered lending or any fresh assets created by
the SFB post commencement of operations, in general, would be reckoned in
the ANBC of the SFBs and the PSL norms as applicable to SFBs would kick in.
(vi) The above treatment would
be applicable for grandfathered borrowings in the cases of converting
entities as well.
(vii) The first audited balance
sheet as on March 31st post commencement of operations of the SFB would
form the basis for the first PSL target for the SFB (for the subsequent
year).
(viii) The extant provisions
relating to export and import credit, as applicable to scheduled commercial
banks, shall be applicable to SFBs as well, from within the framework of
being a holder of an AD Cat II licence.
7. Bank deposits
(i) All RBI and BR Act
provisions and RBI directions relating to minimum balance, inoperative
accounts, unclaimed deposits including transfer of such deposits to the
Depositors Education and Awareness Fund maintained by RBI on regular basis,
nominations, cheques/drafts, etc., will be applicable to the SFBs.
(ii) Small Finance Banks
·
may at
their discretion, issue passbooks for the deposit accounts;
·
should
give written/printed proof of the first time deposit, in addition to the
electronic confirmation of the deposit;
·
should
send statement of accounts once in six months to the registered address
free of cost, if passbooks have not been issued;
·
may
provide statement of account in paper form on request on chargeable basis
or otherwise, if passbooks have not been issued;
·
may
provide account information through multiple user friendly modes such as
SMS and/or internet banking; and
·
should
provide electronic confirmation through SMS/e-mail/printed proof for each
account transaction.
8. KYC requirements
At their discretion, SFBs may
(like all other banks) decide not to take the wet signature while opening
accounts, and instead rely upon the electronic authentication/confirmation
of the terms and conditions of the banking relationship/account
relationship keeping in view their confidence in the legal validity of such
authentications/confirmations. However, all the extant regulations
concerning KYC including those covering the Central KYC Registry, and any
subsequent instructions in this regard, as applicable to commercial banks,
would be applicable to SFBs.
9. Foreign exchange business
Small Finance Banks shall:
(i) comply with all the
conditions attached with the AD Cat II licence that will be issued by the
Foreign Exchange Department, RBI. SFBs may conduct some additional foreign
exchange businesses as may be specifically permitted by the Reserve Bank.
(ii) implement the provisions of
Foreign Contribution (Regulation) Act, 2010 (as applicable to scheduled
commercial banks.
10. Other banking services
10.1 Currency distribution
(covering detection of forged and counterfeit notes, currency chest
facilities, facilities for exchange of notes)
SFBs may, at their option,
exchange mutilated and defective notes at their branches. All extant
regulations concerning currency chests, as applicable to commercial banks,
will be applicable to SFBs.
10.2 Customer education and
protection
(i) All customer grievance
issues related to a particular satellite office/door-step customer service
centre should be addressed both at the centres and the base branches.
(ii) SFBs will be covered by the
Banking Ombudsman (BO) Scheme.
(iii) The mechanism put in place
by SFBs to effectively resolve customer complaints and its communication to
customers, and role of different levels (door-step customer service
centre/satellite office, branch, controlling office, head office) in
grievance redress should be clearly communicated to RBI along with the
application for licence.
(iv) The customer service policy
approved by the boards of the SFBs should provide for continuous and
intensive monitoring of customer grievance redressal by the SFBs.
(v) RBI will closely supervise
the grievance redress system of the bank through both onsite and off-site
surveillance system.
10.3 Credit information
reporting
(i) SFBs should become members
of all the four credit information companies (CICs) and report all credit
data to them as per current RBI directions.
(ii) SFBs should also follow the
RBI directions regarding declaration and reporting of large defaulters’ and
wilful defaulters’ data to the CICs.
11. Outsourcing of operations,
internet banking and mobile banking
The extant provisions as
applicable to scheduled commercial banks shall be applicable to SFBs as
well.
12. Implementation of Ind AS
Implementation of Ind AS would
be applicable to SFBs once they become scheduled banks. In view of the
same, it is recommended that the SFBs start adoption of the same in order
to avoid transition costs subsequently.
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