Synopsis: Former Financial Services Secretary D.K. Mittal emphasized the key role of small finance banks (SFBs) in promoting financial inclusion and suggested that the Reserve Bank of India (RBI) should ease certain restrictions to help them transition to universal banks.
Former Financial Services Secretary D.K. Mittal emphasized the crucial role of small finance banks (SFBs) in promoting financial inclusion and recommended that the Reserve Bank of India (RBI) ease certain restrictions to facilitate their transition to universal banks.
In New Delhi, Mittal stated that most SFBs would not rush to become universal banks if the RBI relaxed some of the imposed restrictions.
This comment underscores the importance of SFBs in advancing financial inclusion in India.
The RBI introduced guidelines for licensing small finance banks in the private sector in 2014, granting licenses to a dozen entities.
These guidelines require SFBs to open at least 25 percent of their branches in unbanked rural areas and allocate 75 percent of their loans to the priority sector, compared to 40 percent for commercial banks.
Recently, the RBI invited applications from small finance banks meeting specific criteria, including a minimum net worth of Rs 1,000 crore, to become universal banks.
Mittal suggested that the RBI should lift certain restrictions on SFBs, such as the SFB tag, to promote financial inclusion.
He proposed allowing SFBs to engage in co-lending, issue pass-through certificates (PTCs) and securitization, and establish subsidiaries.
He advocated for treating SFBs on par with commercial banks, except for adhering to three core principles: priority sector lending, loans below Rs 25 lakh, and Basel II capital requirements.
This would allow SFBs to function as universal banks with a unique focus on financial inclusion.
Mittal argued that SFBs already comply with most universal banking guidelines, with additional responsibilities like 75 percent priority sector lending and 50 percent of loans below Rs 25 lakh.
He believes this would enable customers to view all commercial banks equally.
Meeting these criteria would enable SFBs to operate as universal banks while continuing to support financial inclusion and serve the lower strata of society.
This approach would reduce the urgency among SFBs to transition to universal banks.
According to the RBI's April guidelines, an SFB seeking to become a universal bank must have a minimum net worth of Rs. 1,000 crore at the end of the previous audited quarter, be listed on a recognized stock exchange, and have a net profit in the last two financial years.
Additionally, the SFB must have Gross NPA and Net NPA ratios of less than or equal to 3 percent and 1 percent, respectively, over the last two financial years, meet the prescribed CRAR requirements, and demonstrate a satisfactory performance record for at least five years.
In conclusion, former Financial Services Secretary D.K. Mittal's recommendations highlight the significant role of small finance banks (SFBs) in advancing financial inclusion.
He suggests that the Reserve Bank of India (RBI) should relax certain restrictions to enable SFBs to transition to universal banks more smoothly.
By lifting these restrictions and allowing SFBs to operate with a differentiated focus on financial inclusion, SFBs can continue to serve the lower strata of society effectively.
This approach would likely reduce the pressure on SFBs to become universal banks, ensuring they can fulfill their essential role in the financial ecosystem while adhering to core banking principles.
Related Questions
1. What are some of the key recommendations made by former Financial Services Secretary D.K. Mittal regarding small finance banks (SFBs) and their transition to universal banks?
D.K. Mittal emphasized the crucial role of small finance banks (SFBs) in promoting financial inclusion and recommended that the Reserve Bank of India (RBI) ease certain restrictions to facilitate their transition to universal banks.
2. How does Mittal emphasize the importance of SFBs in promoting financial inclusion, and what changes does he propose to facilitate this role?
Mittal suggested that the RBI should lift certain restrictions on SFBs, such as the SFB tag, to promote financial inclusion. He proposed allowing SFBs to engage in co-lending, issue pass-through certificates (PTCs) and securitization, and establish subsidiaries.
3. What are some of the restrictions on SFBs imposed by the Reserve Bank of India (RBI), and why does Mittal suggest easing these restrictions?
These guidelines require SFBs to open at least 25 percent of their branches in unbanked rural areas and allocate 75 percent of their loans to the priority sector, compared to 40 percent for commercial banks.
4. What criteria must an SFB meet to become a universal bank according to the RBI's recent guidelines, and how does this relate to Mittal's recommendations?
According to the RBI's April guidelines, an SFB seeking to become a universal bank must have a minimum net worth of Rs. 1,000 crore at the end of the previous audited quarter, be listed on a recognized stock exchange, and have a net profit in the last two financial years.
5. How does Mittal argue for treating SFBs on par with commercial banks while maintaining a focus on financial inclusion, and what benefits does he suggest this approach would offer?
He advocated for treating SFBs on par with commercial banks, except for adhering to three core principles: priority sector lending, loans below Rs 25 lakh, and Basel II capital requirements. This would allow SFBs to function as universal banks with a unique focus on financial inclusion.
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