A small finance bank, also known as SFB, is a financial institution established to offer financial services to a small group of customers. These banks generally serve in niche areas such as offering loans, accepting deposits, and facilitating insurance-based services. All in all, these are the banks that provide specified services mentioned under the financial services sectors.
So, if you also plan to start a small finance bank in India, you should read this article. We will discuss niche banks, their purpose, and how you can set up one.
What is Niche Bank?
As the name suggests, these are the financial institutions that fulfil the demographic needs of ideal customers or groups of people. These banks modify their banking services as per the needs of their customers and their preferences. Moreover, these are established by RBI under the guidelines of the Indian government.
Purpose of Small Finance Banks
In general, small financial banks solve the financial issues of rural and semi-urban areas. These banks also help startups, small and micro farmers, and others get loans and other financial services with their low-income sources.
Small finance banks offer affordable loan facilities quite affordable to normal banks. Moreover, the registration of SFBs completes under a Public Limited Company, under the Companies Act, 2013, and gets licensed under Section 22 of the Banking Regulation Act,1949.
How to Start a Small Finance Bank in India?
You can start your small finance bank in two ways: Profit Making Corporation and Non-Profit Making Corporation. However, in both cases, you will require a clear plan for forming your financial bank and needed funds. Let’s discuss both methods in detail and understand their features.
Small Finance Bank under Section 8
You can set up a small finance bank under section 8, which comes under a non-profit microfinance business. Below are its major features that will help you understand why you can form it.
- This type of financial institution is exempted from RBI approval. It does not require getting licensed like other banks and NBFCs.
- The registration process is much cheaper than the registration of other banking institutions.
- You need to comply with limited compliances compared to NBFCs-MFI.
- These banks can allow unsecured loans to small businesses up to Rs 50,000.
- These financial institutions can provide up to Rs 1,25,000 in loans to dwelling residents.
- Also, there is not any minimum ceiling on fundraising.
- You must get a license under Section 8 of the Companies Act 2013.
- However, these banks can not accept the demand deposits from their customers.
- The loan interest rate can not exceed 26% of a given amount.
- Moreover, the processing charges should not exceed 1% of the gross loan amount.
- There are specified guidelines under which banks provide their loan services.
Registration Process for Small Finance Bank under Section 8
If you think you need to set up a small finance bank as a non-profit financial institution, you will require to follow the below-mentioned steps.
- First of all, you must get DSC and DIN.
- In addition, you will require two directors to incorporate this financial bank under Sector 8 company.
- You must also apply for name approval.
- And once the bank name gets approved, you will be required to apply for a central government license. Also, prepare other documents necessary for filling out the requisite forms.
- When you get approved by the central government, you will need to apply for incorporation to obtain an incorporation certificate.
- Once your company is formed, you must apply for PAN and TAN, and you are ready to serve your financial customers.
Small Finance Bank as NBFC
If you want to start a small financing bank to make a profit at scale, it’s ideal to set up a small finance company such as NBFC. Below are the documents required to complete the application form.
- The director or shareholder must submit proof of income.
- It is also required to provide a net income certificate of the director, shareholder, and company itself.
- Submit credit reports of directors and shareholders.
- The MOA and AOA of these financial banks must also describe financial, investment, or lending business.
- Also, you have to obtain an incorporation certificate of the company as NBFC.
- The founder of such financial institutions must get a banker’s certificate of no lien with net funds of Rs 5 cr.
- You need to get a banker’s report about the company and group for additional documents.
- Moreover, the educational proof of the director, along with their experience in the relevant domain.
- Detailed and action-oriented plans about banking services and their terms are required to regulate banking services.
- The plan of the financial bank’s structure and decision-making processes.
- Proof of board resolution that shows favour of forming NBFC.
Registration Process Small Finance Bank as NBFC
You have learned the documents needed to set up your small finance bank under NBFC. Let’s also discuss the complete process you will require to execute.
It’s essential to do company registration as NBFC while forming this financial bank. You can register your small finance bank as a private or public limited company.
Once you complete the registration process, you need to obtain the capital, which is Rs 5 cr as minimum paid-up capital.
Certificate of No Lien
You will need to obtain a certificate of no lien from a recognized bank. To do this, you can make five crores as a fixed deposit and get the certificate for the same.
Registration with RBI
This online application with RBI will establish your small finance bank as NBFC. You get a CAR or company application reference number when you submit your application form.
Filing with RBI
After completing your application form and submitting it, get the hard copy of it and supporting documents, as mentioned in the guidelines. Once you have all these documents, you can visit the regional office of RBI and complete further process.
How will you earn money from the Small Finance Bank?
- Generally, small finance banks facilitate demand deposits, fixed deposits, commercial papers, and other financial activities.
- These banks provide up to 7% interest on savings accounts and set up some conditions.
- On FD accounts, small finance banks provide up to a 9% interest rate.
- However, from gathered money deposits, it provides group loans and individual loans.
- The loan can be categorized into various parts like an agricultural loan, education loan, and home purchase loan.
In short, SFBs mainly make money by providing loans to a group of people and individuals.
These days small finance banks are offering loan facilities to low-income people and generating great money. If you also think you can form a small finance bank, you have the required process for both types of small finance banks. However, if you wish to start a small bank to make a profit, it’s good to consider SFB as NBFC. Here your major source of earning would be group and individual loans. Also, by forming this financial institution, you can accept demand deposits.