licensed under the Banking Regulation Act. Further, the SFBs licenced in terms of the On Tap Guidelines are required to
maintain a paid-up voting equity capital of = 2,000 million, which certain exceptions, such as in case of SFBs which are
transited from Primary (Urban) Co-operative Banks, or converted from NBFCs/MFIs etc., for which the requirement is
separately set out.

The SFB Licensing Guidelines have been modified by the circular on ‘Guidelines for Licensing of Small Finance Banks
in Private Sector’ dated November 27, 2014 — Modifications to existing norms’ on March 28, 2020 and the RBI in order
harmonise the instructions for existing SFBs with those SFBs to be licensed under ‘On-Tap Licensing Guidelines’ has
granted certain general permissions and exemptions to all existing SFBs in order to comply with On- Tap Licensing
Guidelines and has provided certain clarifications.

Reserve Bank of India’s Operating Guidelines for Small Finance Bank dated October 6, 2016 (“SFB Operating
Guidelines”)

The SFB Operating Guidelines are supplementary to SFB Licensing Guidelines. The SFB Operating Guidelines came
into force considering the differentiated nature of business and financial inclusion focus of small finance banks. The SFB
Operating Guidelines set out the following:

1. Prudential Regulation: The prudential regulatory framework for the SFBs will be largely drawn from the Basel
standards. However, given the financial inclusion focus of these banks, it will be suitably calibrated:
a) Capital adequacy framework: The minimum capital adequacy requirement is 15%;
b) Leverage ratio: The leverage ratio is 4.5%, calculated as percentage of Tier 1 capital to total exposure;
and
c) Inter-bank borrowings: SFBs are allowed exemption from the existing regulatory ceiling of interbank

borrowings till the existing loans mature or up to three years, whichever is earlier. Afterwards, it will
be on par with scheduled commercial banks. However, the borrowings made by the SFBs after the
commencement of its operations shall be subject to inter-bank borrowing limits.

2s Corporate governance:

a) Constitution and functioning of board of directors: The extant provisions as applicable to banking
companies shall be applicable to SFBs as well. Specifically in case of entities being converted into
SFBs, the existing terms and conditions of appointment of directors will be grandfathered till
completion of their present term; and

b) Constitution and functioning of committees of the board, management level committees, and
remuneration policies: The extant provisions in this regard as applicable to private sector banks, shall
be applicable to SFBs as well.

3. Banking Operations:

a) Branch authorization policy: SFBs should follow the extant instructions pertaining to the branch
authorization policy applicable to scheduled commercial banks as laid down in the Rationalisation of
Branch Authorisation Policy - Revision of Guidelines issued by the RBI on May 18, 2017. SFBs are
required to have 25% of their branches in unbanked rural centres within one year from the date of
commencement of business. The SFBs are given three years from the date of commencement of the
business to align with this requirement, however, during these three years, at least 25% of total number
of branches opened by SFBs ina financial year should be in unbanked rural centres.

b) Regulation of Business Correspondents: 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
business correspondents These business correspondents 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. In such cases, from the regulatory perspective, the
SFB 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. Further, the Operating Guidelines also provide that the business
correspondents must be doing online transactions/using point of sale terminals for doing transactions;
and

176
