Capital Local Area Bank, a Jalandhar-based local area bank, has emerged as the first entity to have received the Reserve Bank of India’s licence to start operations as a small finance bank.

From day one, it plans to keep all its branches open for all seven days a week. Capital, which claims to be the largest local bank in the country, currently has 44 branches in five districts of Punjab and three more would be opened by March 31.

During the first five years as a small finance bank, it will focus on northern region.

Small Banks:

• Small finance banks are a type of niche banks in India. Banks with a small finance bank license can provide basic banking service of acceptance of deposits and lending.
• The purpose of the small banks will be to provide a whole suite of basic banking products such as deposits and supply of credit, but in a limited area of operation.
• The objective for these Small Banks is to increase financial inclusion by provision of savings vehicles to under-served and unserved sections of the population, supply of credit to small farmers, micro and small industries, and other unorganised sector entities through high technology-low cost operations.
• Resident individuals with 10 years of experience in banking and finance, companies and Societies will be eligible as promoters to set up small banks. NFBCs, micro finance institutions (MFIs), and Local Area Banks (LABs) can convert their operations into those of a small bank. Local focus and ability to serve smaller customers will be a key criterion in licensing such banks.
• Branch expansion: For the initial three years, prior approval will be required.
• The bank shall primarily undertake basic banking activities of accepting deposits and lending to small farmers, small businesses, micro and small industries, and unorganised sector entities.
• It cannot set up subsidiaries to undertake non-banking financial services activities. After the initial stabilisation period of five years, and after a review, the RBI may liberalise the scope of activities for Small Banks.
• In view of concentration of area of operations, the Small Bank would need a diversified portfolio of loans, spread over it area of operations.
• The maximum loan size and investment limit exposure to single/group borrowers/issuers would be restricted to 15 per cent of capital funds.
• Loans and advances of up to Rs 25 lakhs, primarily to micro enterprises, should constitute at least 50 per cent of the loan portfolio.
• For the first three years, 25 per cent of branches should be in unbanked rural areas.