an in in ndia       12.39
          (ii) All the subscribers get the chit amount      smAll bAnks
               by turns with a liability to pay future
                                                            The purpose of the small banks will be to provide
               subscriptions.                               a whole suite of basic banking products such as
                                                            deposits and supply of credit, but in a limited area
        sMall & PayMent Banks                               of operation. The objective of the Small Banks to
     By mid-July 2014, the RBI issued the draft             increase financial inclusion by provision of savings
     guidelines for setting up small banks and payment      vehicles to under-served and unserved sections of
     banks. The guidelines said that both are ‘niche’ or    the population, supply of credit to small farmers,
     ‘differentiated’ banks with the common objective       micro and small industries, and other unorganised
                                                            sector entities through high technology low-cost
     of furthering financial inclusion. It is in pursuance
                                                            operations. Other features of the small banks are
     of the announcement made in the Union Budget
                                                            as follows:
     2014–15. The details regarding the provisions to
     set up such banks and their operational criteria are         (i) Resident individuals with 10 years of
                                                                      experience in banking and finance,
     as given below:
                                                                      companies and Societies will be eligible as
           The guidelines to set up both the banks are
                                                                      promoters to set up small banks. NFBCs,
     same—                                                            microfinance institutions (MFIs), and
           (i) The minimum capital requirement would                  Local Area Banks (LABs) can convert
               be Rs 100 crore.                                       their operations into those of a small
          (ii) Promoter contribution would be at least                bank. Local focus and ability to serve
               40 per cent for the first five years. Excess           smaller customers will be a key criterion
               shareholding should be brought down to                 in licensing such banks.
               40 per cent by the end of fifth year, to 30       (ii) For the initial three years, prior approval
               per cent by the end of 10th year and to                will be required for branch expansion.
               26 per cent in 12 years from the date of         (iii) The area of operations would normally
               commencement of business.                              be restricted to contiguous districts in a
         (iii) Foreign shareholding in these banks will               homogenous cluster of states or union
               be as per current FDI policy.                          territories so that the Small Bank has
         (iv) Voting rights to be line with the existing              a ‘local feel’ and culture. However, if
               guideline for private banks.                           necessary, it would be allowed to expand
                                                                      its area of operations beyon contiguous
          (v) Entities other than promoters will not be
                                                                      districts in one or more states with
               permitted to have shareholding in excess
                                                                      reasonable geographical proximity.
               of 10 per cent.
                                                                (iv) The bank shall primarily undertake basic
         (vi) The bank should comply with the                         banking activities of accepting deposits
               corporate       governance       guidelines,           and lending to small farmers, small
               including ‘fit and proper’ criteria      for           businesses, micro and small industries,
               Directors as issued by RBI.                            and unorganised sector entities. It cannot
        (vii) Operations of the bank should be fully                  set up subsidiaries to undertake non-
               networked and technology driven from                   banking financial services activities. After
               the beginning.                                         the initial stabilisation period of five years,