The Centre’s thrust to take banking services to the rural and backward areas got a major boost with the Reserve Bank of India on Wednesday granting ‘in-principle’ approval to 10 entities to start small finance banks.

This includes Au Financiers, Capital Local Area Bank, Disha Microfin Pvt Ltd, Equitas Holdings Pvt Ltd, ESAF Microfinance and Investments, Janalakshmi Financial Services, Ujjivan Financial Services, and Suryoday Micro Finance.

Barring Jaipur-based Au Financiers (an asset finance company) and Jalandhar-based Capital Local Area Bank, all the other entities are microfinance institutions. This is an indication that the RBI sets great store by microfinance institutions to further the cause of financial inclusion.

The 10 companies have been given 18 months to comply with the guidelines for licensing of small finance banks.

Of the 72 companies that applied for a licence, the prominent names that did not make it in this round include Dewan Housing Finance Corp, IIFL Holdings Ltd, Lulu Forex Pvt Ltd, Satin Creditcare Network, SKS Microfinance, and UAE Exchange & Financial Services.

However, it is not the end of the road for these entities as the RBI has said it intends to use the learning from this round to appropriately revise the guidelines and move to giving licences more regularly, that is, virtually ‘on tap’.

Small finance banks are different from traditional banks because they will primarily undertake basic banking activities, of acceptance of deposits and lending, to un-served and underserved sections, including small business units, small and marginal farmers, micro and small industries and unorganised sector entities.

These banks are required to extend 75 per cent of their loans to the sectors eligible for classification as priority sector lending (agriculture, micro, small and medium enterprises, education, housing, etc).

At least 50 per cent of their loan portfolio should constitute loans and advances of up to ₹25 lakh.

The central bank said the selection involved three stages – preliminary scrutiny by the RBI team, an external advisory committee (under the chairmanship of Usha Thorat, former RBI Deputy Governor) recommended applications to be taken up for detailed scrutiny, and an internal screening committee.

The announcement on small finance banks comes nearly a month after the RBI released the names of 11 payment banks.

The RBI was more conservative in granting approval to set up SFBs, with only 10 out of the 72 applicants making the final list. In contrast, 11 out of 41 applicants got an opportunity to set up payments banks.

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