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GS Paper: GS3-02.Inclusive growth and issues therein

  • NITI Aayog’s Multidimensional Poverty Index (MPI)

    The Government think-tank NITI Aayog has released the National Multidimensional Poverty Index (MPI).

    Multidimensional Poverty Index (MPI)

    • This baseline report of India’s first-ever national MPI measure is based on the reference period of 2015-16 of the National Family Health Survey (NFHS)- 4.
    • It uses the globally accepted and robust methodology developed by the Oxford Poverty and Human Development Initiative (OPHI) and the United Nations Development Programme (UNDP).
    • It captures multiple and simultaneous deprivations faced by households.

    Parameters used

    • The NMPI is calculated using 12 indicators — nutrition, child and adolescent mortality, antenatal care, years of schooling, school attendance, cooking fuel, sanitation, drinking water, electricity, housing, assets and bank account,
    • They have been grouped under three dimensions namely, health, education and standard of living.

    Why NFHS-4?

    • Data collected during the NFHS-4 (2015-2016) corresponds to the period before the full roll out of new governments’ flagship schemes.
    • Hence it serves as a useful source for measuring the situation at baseline i.e. before large-scale rollout of nationally important schemes.

    How is the data used?

    • The national MPI 2021 is calculated using the household microdata collected at the unit-level for the NFHS-4 that is used to derive the baseline multidimensional poverty.
    • Further, the country’s progress would be measured using this baseline in the NFHS-5, for which the data was collected between 2019 and 2020.
    • The progress of the country with respect to this baseline will be measured using the NFHS-5 data collected in 2019-20.

    Key highlights NMPI

    • As per the index, 51.91% of the population in Bihar is poor, followed by Jharkhand (42.16%), Uttar Pradesh (37.79%), Madhya Pradesh (36.65%) and Meghalaya (32.67%).
    • On the other hand, Kerala registered lowest population poverty levels (0.71%), followed by Puducherry (1.72%), Lakshadweep (1.82%), Goa (3.76%) and Sikkim (3.82%).
    • Other States and UTs where less than 10% of the population are poor include Tamil Nadu (4.89%), Andaman & Nicobar Islands (4.30%), Delhi (4.79%), Punjab (5.59%), Himachal Pradesh (7.62%) and Mizoram (9.8%).

     

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  • The growth and inclusion potential of India’s telecom sector

    Context

    Shortly after the Cabinet announced nine structural and procedural reforms in September to address the deep financial woes of telcos, Vodafone Idea and Bharti Airtel hiked their tariff.

    About the package for telecom sector

    • The telecom relief package announced by the government in September supports proposals that have been repeatedly presented to the government by the regulator, industry associations and think tanks.
    • Risk of duopoly: With the risk of a duopoly looming large, the government was pushed to take up these long-pending decisions that included nine key changes.
    • Provisions in the package: Besides providing immediate relief on payment of licence fee and penalties due to the government, the package increased FDI limits, extended licence tenure to 30 years from 20, removed charges on spectrum-sharing and proposed timelines for spectrum auctions.
    • The package will undoubtedly have a positive short-term impact and perhaps safeguard competition in the future.

    Reforms and  challenge of addressing the inequality

    • From socialist to market-oriented economy: In July this year, we celebrated three decades of India’s 1991 reforms, one that catapulted India from being a socialist economy with a heart but no trickle-down, to a market-oriented economy with a mind but also very little trickle-down.
    • Inequality has been a feature of both models.
    • The 2018 Oxfam report showed that 10 per cent of the richest Indians took home 77.4 per cent of wealth (compared to 73 per cent the year before).
    • Moreover, 58 per cent of India’s wealth was in the hands of 1 per cent of the country’s population.
    • Changes in the modes of distribution: In the pre-1991 period, the principal modes of redistribution were taxation and public sector operations.
    • In the post-1991 period, it has been a combination of taxation, technology, smartphones and the associated direct benefit transfers.

    Role of telecom sector in addressing the challenge of achieving growth and inclusion

    • High growth dividend of telecom sector: Every 10 per cent increase in investment in telecom, for example, leads to a 3.2 per cent increase in GDP growth for India.
    • Not only is the growth dividend positive, it is large.
    • Mobile as a mean of financial integration: At the same time, the mobile phone has become a means for sophisticated financial integration, as shown by the expanding usage of pre-paid payment instruments and mobile banking.
    • The Jan-Dhan Yojana (JDY) attempts to include the marginalised and unbanked through technology.
    • As of October 2021, a total of 440 million bank accounts have been opened and more than 310 million RuPay cards have been issued under the latter, indicating the large unmet demand for banking services.
    • Making transfers predictable and targeted: The Jan-Dhan-Aadhaar-Mobile (JAM) trinity ties the Aadhaar number to an active bank account, making income transfers predictable and targeted.
    • There is already evidence that payments through Aadhaar-linked bank accounts have increased efficiency and reduced leakages.

    Way forward

    • Predictable and less erratic telecom policy: The benefits of digitalisation could have been much larger and more widespread had telecom policy been more predictable and less erratic.
    • That Indian reforms more often than not happen on the back of a crisis is true for the telecom sector.
    • The principal motive of the New Telecom Policy of 1999 was to rescue the deeply indebted sector of its own reckless bidding by replacing the fixed licence fee system with a revenue-sharing regime.
    • In hindsight, it was the right thing to do since it threatened business continuity.
    • The move to auction spectrum “for all times to come” in 2008 was necessitated by the administrative bungling in spectrum assignment.
    • Quick adaptation: A question we pose is why did it take a crisis — a grave one at that — to push the needle on policy change?
    • It is a a reasonable expectation of policy to adapt quickly and not wait for a crisis to emerge.

    Consider the question “Telecom sector could play an important role in achieving the growth with inclusion. In context of this, examine the challenges facing the sector and suggest the measures to deal with these challenges.”

    Conclusion

    The seemingly naïve question about the adaptation in policies may not be as credulous for the intensely dynamic digital markets. For there is no point shutting the stable door after the horse has bolted.

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  • Co-op Societies are not banks, RBI cautions

    The Reserve Bank of India (RBI) has cautioned members of the public not to deal with cooperative societies undertaking banking business by adding ‘bank’ to their names.

    What is the news?

    • It has also come to the notice of RBI that some co-operative societies are accepting deposits from non-members/nominal members/ associate members.
    • This is tantamount to conducting banking business in violation of the provisions.

    Who can use ‘Bank’ title?

    • The Banking Regulation Act, 1949 was amended by the Banking Regulation (Amendment) Act, 2020, which came into force on September 29, 2020.
    • Accordingly, co-operative societies cannot use the words “bank”, “banker” or “banking” as part of their names, except as permitted under the provisions of BR Act, 1949 or by the RBI.

    What is Cooperative Banking?

    • Cooperatives are people-centred enterprises owned, controlled and run by and for their members to realise their common economic, social, and cultural needs and aspirations.
    • Cooperative bank is an institution established on the cooperative basis and dealing in ordinary banking business.
    • Like other banks, the cooperative banks are founded by collecting funds through shares, accept deposits and grant loans.
    • They are regulated by the Reserve Bank of India (RBI) and governed by the
    1. Banking Regulations Act 1949
    2. Banking Laws (Co-operative Societies) Act, 1955

    Features of Cooperative Banks

    • Cooperative banks are generally concerned with the rural credit and provide financial assistance for agricultural and rural activities.
    • Such banking in India is federal in structure. Primary credit societies are at the lowest rung.
    • Then, there are central cooperative banks at the district level and state cooperative banks at the state level.
    • Cooperative credit societies are mostly located in villages spread over the entire country.

    History of Cooperative Banking in India:

    • The cooperative movement in India was started primarily for dealing with the problem of rural credit.
    • The history of Indian cooperative banking started with the passing of Cooperative Societies Act in 1904.
    • The objective of this Act was to establish cooperative credit societies “to encourage thrift, self-help and cooperation among agriculturists, artisans and persons of limited means.”
    • Many cooperative credit societies were set up under this Act.
    • The Cooperative Societies Act, 1912 recognised the need for establishing new organisations for supervision, auditing and supply of cooperative credit.

    Structure of Cooperative Banking

    • The whole structure of cooperative credit institutions is shown in the chart given.
    • There are different types of cooperative credit institutions working in India.
    • These institutions can be classified into two broad categories- agricultural and non-agricultural.
    • Agricultural credit institutions dominate the entire cooperative credit structure.

    Various facets of cooperatives in India

    • Cooperatives in India have grown exponentially.
    • In the banking sector, according to the RBI, their contribution to rural credit increased from 3.1 percent in 1951 to an impressive 27.3 percent in 2002.

    Importance of Cooperative Banks:

    • The cooperative banking system has to play a critical role in promoting rural finance and is especially suited to Indian conditions.
    • Various advantages of cooperative credit institutions are given below:

    (1) Alternative Credit Source:  The main objective of the cooperative credit movement is to provide an effective alternative to the traditional defective credit system of the village moneylender.

    (2) Cheap Rural Credit: Cooperative credit system has cheapened the rural credit by charging comparatively low-interest rates, and has broken the money lender’s monopoly.

    (3) Productive Borrowing:  The cultivators used to borrow for consumption and other unproductive purposes. But, now, they mostly borrow for productive purposes.

    (4) Encouragement to Saving and Investment: Instead of hoarding money the rural people tend to deposit their savings in cooperative or other banking institutions.

    (5) Improvement in Farming Methods: Cooperative credit is available for purchasing improved seeds, chemical fertilizers, modern implements, etc.

    (6) Financial Inclusion: They have played a significant role in the financial inclusion of unbanked rural masses. They provide cheap credit to the masses in rural areas.

     

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  • Why India’s pro-rich, anti-poor taxation policies must change

    Context

    To develop their renewable energy capacities poor countries may well have to help themselves to make the transition that society urgently needs. One source of funding could well be the well-off citizens of India, who are getting richer and richer.

    Growing inequality in India

    • A 2018 Oxfam report revealed that 10 per cent of the richest Indians garnered 77.4 per cent of the nation’s wealth.
    •  In fact, according to the report, 58 per cent of India’s wealth was in the hands of one per cent of the country’s population.
    • The combined income of this handful of people in 2017 was almost as much as India’s budget that year.
    • In 2017, the fortune of India’s 100 richest tycoons leaped by 26 per cent.
    •  According to Crédit Suisse, the number of dollar millionaires in India has jumped from 34,000 in 2000 to 7,59,000 in 2019 — in other words, the country has one of “the world’s fastest-growing population of millionaires”.
    • The average wealth of these millionaires has increased by 74 per cent over this period.

    Issues with taxation policies

    • The taxation policy of the government, instead of making the exchequer benefit from this trend, has actively strengthened the trend of growing millionaires.
    • Replacing wealth tax by increasing income tax: The government replaced the wealth tax by an income tax increase of two per cent for households that earned more than 10 million rupees annually.
    • Corporate tax was reduced: The corporate tax was lowered, for existing companies from 30 per cent to 22 per cent, and for manufacturing firms incorporated after October 1, 2019 that started operations before March 31, 2023, from 25 to 15 per cent — the biggest reduction in 28 years.
    • Increase in income tax exemptions: In the 2019-20 budget, the income tax exemption limit jumped from Rs 2,00,000 to 2,50,000 and the tax rate for incomes up to Rs 5 lakh was reduced from 10 to 5 per cent.

    Impact of pro-rich taxation policy

    • Deprives the state of resources: This taxation policy deprived the state of important resources.
    • Increase in indirect taxes: To (partly) compensate for the decline of direct taxes, the government has increased indirect taxes, unfairly so, because they affect all Indians irrespective of their income.
    • The share of indirect taxes in the state’s fiscal resources has increased to reach 50 per cent of total taxes in 2018.
    • Taxes on petroleum products are a case in point.

    High taxes on petroleum products

    • About two-thirds of the cost of a litre of petrol now goes towards taxes.
    • The tax collected on petrol and diesel has increased by 459 per cent in the past seven years — from Rs 52,537 crore in 2013 to Rs 2.13 lakh crore in 2019-2020.
    • Given that petrol is a less elastic good, people are bound to consume it even at higher prices.
    • This also explains why the government sees fuel sale in India as a safe “revenue collection” medium.
    • In 2018-19, excise duty on petroleum products alone accounted for roughly 24 per cent of the indirect tax revenue.

    Consider the question “India’s taxation policies are criticised for being pro-rich. In the context of this, discuss the issues with the taxation system and suggest the measure to deal with these issues.”

    Conclusion

    The government’s taxation policy will probably continue to prevail depriving the exchequer of some of the resources it needs for dealing with issues as important as climate change.

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  • Formal sector and fine print

    Context

    A recent study by SBI has reported that the Indian economy witnessed accelerated formalisation under the distressed conditions of the pandemic and the lockdown last year. The study estimates that the share of the informal economy has fallen to a mere one-fifth of GDP — a figure comparable to many advanced economies.

    Understanding informality

    • ILO definition: The ILO’s globally accepted framework for definitions is as follows: Informal sector enterprises are defined as private unincorporated enterprises owned by individuals (or households) that are not constituted as separate legal entities independently of their owners.
    • They are not registered under specific national legislation (such as Factories’ or Commercial Acts).
    • Definition of a formal worker in India: Formal workers in India, on the other hand, are defined as those having access to at least one social security benefit such as a provident fund or healthcare benefits.

    What explains the decline of informal sector in GDP

    • Significance of informal sector: In 2017-18, as per the latest official statistics, India’s informal sector accounted for approximately 52 per cent of its GDP, employing 82 per cent of the total workforce.
    • These ratios have broadly remained unchanged over the last decade.
    • Most affected due to pandemic: As the informal (unorganised) sector bore much of the brunt of the economic contraction during 2020-21, a decline in its share in GDP is unsurprising.
    • Lack of financial strength: The sector had neither the financial strength nor the technical wherewithal to face the Covid shock.
    • Inadequate policy support: Additionally, policy support, mostly supply-side measures, was mainly focused on firms in the formal sector, with the informal sector left to fend for itself.

    Issues with decline

    • Undeniably, the informal sector’s share in GDP is likely to have shrunk due to the Covid shock.
    • However, alarmingly, the purported decline in the informal sector’s share in GDP has not been accompanied by an expected reduction in its employment share. 
    • Data from the official annual Period Labour Force Survey (PLFS) 2017-18 and 2019-20, where the latter includes the period of the Covid shock from April to June 2020, shows that the employment share in non-agricultural informal enterprises has increased from 68 per cent in 2017-18 to 69.5 per cent in 2019-20.
    • These figures do not include the agricultural sector, where employment is almost entirely in the informal sector.
    • The increasing share of the formal sector in terms of GDP but declining share in employment only widens the schism (or dualism) between the two sectors.
    • The increasing share of the formal sector in terms of GDP but declining share in employment only widens the schism (or dualism) between the two sectors.

    Implications

    • Impact on investment and growth: The lack of remunerative jobs for the vast majority of Indian consumers implies that eventually the lack of growth in demand will adversely impact investment and economic growth.
    • After all, a mere 17-18 per cent of the workforce in the organised sector cannot sustain growth of the economy in the long run.
    •  Squeezing out informal enterprises: The increase in the formal sector’s share in GDP due to Covid-19 is a result of large, formal enterprises squeezing out informal enterprises.
    • It is important to note here that the increase in formalisation is not a consequence of micro and small informal firms transitioning to formality.

    Increasing productivity: A way forward to formalisation

    • Promoting formalisation: Over the last five years, the economy has officially witnessed a significant drive towards formalisation.
    • Multiple reasons for avoiding formalisation: It is crucial to recognise that firms exist in the informal sector for various reasons and not simply to evade regulations and taxation.
    • Significance of productivity: Many own account enterprises and MSMEs cannot afford to survive in the formal sector due to their low productivity.
    • It is essential to view the process of formalisation as a development strategy that requires stepping up investment in physical and human capital to boost productivity and the extension of social security benefits for all workers, not just a registration strategy on myriad portals.

    Consider the question “Informal sector has been affected disproportionately in the wake of the pandemic. What are the implications of this for the economy? Suggest the way forward for the formalisation.”

    Conclusion

    The informal sector will come back to life as much of it represents the survival efforts of the working poor. Celebrating formalisation based on the misery and devastation of poor informal workers (and their meagre productive assets) is not just misplaced but also callous.

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  • India now ahead of China in financial inclusion metrics: SBI report

    India is now ahead of China in financial inclusion metrics, with mobile and Internet banking transactions rising to 13,615 per 1,000 adults in 2020 from 183 in 2015.

    What does one mean by Financial Inclusion?

    • Financial inclusion is defined as the availability and equality of opportunities to access financial services.
    • It refers to a process by which individuals and businesses can access appropriate, affordable, and timely financial products and services.
    • These include banking, loan, equity and insurance products etc.

    Key highlights of the Report

    • Boosted by PM Jan-Dhan Yojana, the number of bank branches per 100,000 adults in India rose to 14.7 in 2020 from 13.6 in 2015.
    • It is higher than Germany, China and South Africa.
    • Data shows that states with higher Jan-Dhan accounts balances have seen a perceptible decline in crime.

    How did India achieve financial inclusion?

    • Financial inclusion policies have a multiplier effect on economic growth, reducing poverty and income inequality, while also being conducive for financial stability.
    • India has stolen a march in financial inclusion with the initiation of PMJDY accounts since 2014.
    • It was enabled by a robust digital infrastructure and also careful recalibration of bank branches and thereby using the BC model judiciously.
    • Such financial inclusion has also been enabled by use of digital payments.

    What is the BC Model?

    • The report highlighted that the Banking Correspondent (BC) model in India is enabled to provide a defined range of banking services at low cost.
    • The new branch authorisation policy of 2017 –recognises BCs that provide banking services for a minimum of 4-hours per day and for at least 5-days a week as banking outlets.
    • The BCs are enabled to provide a defined range of banking services at low cost and hence are instrumental in promoting financial inclusion.
    • This has progressively done away the need to set up brick and mortar branches.

     

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  • Principles of Responsible Banking (PRBs)

    Global banks are pledging to report annually on the carbon emissions linked to the projects they lend to in an extension to the Principles for Responsible Banking (PRBs).

    What are PRBs?

    • The PRBs are a unique framework for ensuring that signatory banks’ strategy and practice align with the vision society has set out for its future in the SDGs and the Paris Climate Agreement.
    • It was created in 2019 through a partnership between founding banks and the United Nations.
    • The framework consists of 6 Principles designed to bring purpose, vision and ambition to sustainable finance.
    • Signatory banks commit to embedding these 6 principles across all business areas, at the strategic, portfolio and transactional levels:

    Note: India’s YES BANK Limited is the only Indian signatory to this framework.

    Significance of the PRBs

    • Banks can contribute to solving the climate crisis from two angles: their lending and their investments.
    • Many bank policies concentrate their investments on securities that were focused on sustainability.

    Issues with PRB

    • Being a signatory to the PRBs is a limited commitment.
    • Signatories have four years to comply with the principles.
    • Even then, everything is voluntary and non-binding, so signatories are not penalized or even named and shamed for failing to live up to the principles.

    Way forward

    • When signatories to the PRBs are lending money, they are supposed to carry out environmental impact assessments and to measure the greenhouse gas emissions of projects.
    • This is not a minor issue considering that such work is beyond the traditional competencies of banks and will significantly affect their operational costs.
    • Signatories are also supposed to ensure that loans go to projects that are carbon neutral.

     

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  • Farmer suicide

    The number of agricultural labourers who died by suicide in 2020 was 18% higher than the previous year, according to the National Crime Records Bureau (NCRB) report.

    Farmers suicide in 2020

    • In 2020, 5,098 of these agricultural labourers died by suicide, an 18% rise from the 4,324 who died last year.
    • Overall, 10,677 people engaged in the farm sector died by suicide in 2020, slightly higher than the 10,281 who died in 2019.
    • They made up 7% of all suicides in the country.
    • Most of these deaths were among those whose primary work and main source of income comes from labour activities in agriculture or horticulture.
    • However, among farmers who cultivate their own land, with or without the help of other workers, the number of suicides dropped 3.7% from 5,129 to 4,940.
    • Among tenant farmers who cultivate leased land, there was a 23% drop in suicides from 828 to 639.

    State-wise data

    • The worst among States continues to be Maharashtra, with 4,006 suicides in the farm sector, including a 15% increase in farm worker suicides.
    • Other States with a poor record include Karnataka (2016), Andhra Pradesh (889) and Madhya Pradesh (735).
    • Tamil Nadu also bucked the national trend; although the total number of farm suicides in the State was slightly higher.

    Why more suicides despite a boom?

    • The farm sector was one of the few bright spots in the Indian economy since a year.
    • It recorded growth on the back of a healthy monsoon and the continuation of agricultural activities during a lockdown that crippled other sectors.
    • Hence, suicides among landowning farmers dropped slightly during the pandemic year.
    • Landless agricultural labourers who did not benefit from income support schemes such as PM Kisan may have faced higher levels of distress during the pandemic.

    General causes of farmers suicides in India

    Suicide victims are motivated by more than one cause however the primer reason is the inability to repay loans.

    • Debt trap: Major causes reportedly are bankruptcy/indebtedness, problems in the families, crop failure, illness and alcohol/substance abuse.
    • Lack of credit: Low access to credit, irrigation and technology worsens their ability to make a comfortable living.
    • Responsibility burden: In other words, debt to stress and family responsibilities as reasons were significantly higher than fertilizers and crop failure.
    • Disguised unemployment: This remains high. Fragmentation of land holdings has left far too many farmers with farms that are too small to be remunerative.
    • Mental health: One of the major causes behind suicidal intent is depression. Farmers are often subjected to fear of boycott due to societal pressures.

     

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    Back2Basics: National Crime Records Bureau (NCRB)

    • The NCRB is an Indian government agency responsible for collecting and analysing crime data as defined by the Indian Penal Code (IPC) and Special and Local Laws (SLL).
    • It is headquartered in New Delhi and is part of the Ministry of Home Affairs (MHA).
    • It was set-up in 1986 to function as a repository of information on crime and criminals so as to assist the investigators in linking crime to the perpetrators.
    • It was set up based on the recommendation of the Task force, 1985 and National Police Commission, 197.
    • It merged the Directorate of Coordination and Police Computer (DCPC), Inter State Criminals Data Branch of CBI and Central Finger Print Bureau of CBI.

    Also read:

    [Burning Issue] Farmers’ suicide in India

     

  • APVAX Initiative

    The Government of India has applied for loans from the Asian Development Bank (ADB) and the Asian Infrastructure Investment Bank (AIIB) to procure as many as 667 million doses of COVID-19 vaccines under the APVAX initiative.

    Try this question from CSP 2019

    Q.With reference to Asian Infrastructure Investment Bank (AIIB), consider the following statements:

    1. AIIB has more than 80 member nations.
    2. India is the largest shareholder in AIIB.
    3. AIIB does not have any members from outside Asia.

    Which of the statements given above is/are correct?

    (a) 1 only

    (b) 2 and 3 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

     

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    APVAX Initiative

    • The ADB is expected to lend $1.5 billion and the AIIB around $500 million for the vaccine purchase by India.
    • It which has been made under the ADB’s Asia Pacific Vaccine Access Facility (APVAX) initiative.
    • Launched in December 2020, APVAX offers “rapid and equitable support to its developing member countries as they procure and deliver effective and safe COVID-19 vaccines”.
    • The Beijing-headquartered AIIB will co-finance the vaccine procurement.

    About Asian Development Bank (ADB)

    • The ADB is a regional development bank established on 19 December 1966.
    • It is headquartered in the Ortigas Center located in the city of Mandaluyong, Metro Manila, Philippines.
    • From 31 members at its establishment, ADB now has 68 members.
    • The ADB was modelled closely on the World Bank, and has a similar weighted voting system where votes are distributed in proportion with members’ capital subscriptions.
    • ADB is an official United Nations Observer.
    • As of 31 December 2020, Japan and the UN each holds the largest proportion of shares at 15.571%.
    • China holds 6.429%, India holds 6.317%, and Australia holds 5.773%.

    Asian Infrastructure Investment Bank (AIIB)

    • The AIIB is a multilateral development bank that aims to improve economic and social outcomes in Asia.
    • The bank was proposed by China in 2013 and the initiative was launched at a ceremony in Beijing in October 2014.
    • The bank currently has 103 members, including 16 prospective members from around the world.
    • The starting capital of the bank was US$100 billion, equivalent to 2⁄3 of the capital of the Asian Development Bank and about half that of the World Bank.
    • It received the highest credit ratings from the three biggest rating agencies in the world, and is seen as a potential rival to the World Bank and IMF.

    AIIB and India

    • So far, the AIIB has approved loans for 28 projects in India amounting to $6.7 billion, more than for any other member of the multilateral bank.
    • India is the second-largest shareholder after China in the bank, which does not count the U.S. and Japan among its members.

     

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  • What is a Small Finance Bank?

    The Reserve Bank of India has issued a small finance bank (SFB) license to a consortium of fintech companies BharatPe and Centrum Financial Services Ltd.

    What is a SFB?

    • Small finance banks (SFBs) are a type of niche banks in India.
    • They can be promoted either by individuals, corporate, trusts or societies.
    • They are governed by the provisions of Reserve Bank of India Act, 1934, Banking Regulation Act, 1949 and other relevant statutes.
    • They are established as public limited companies in the private sector under the Companies Act, 2013.
    • Banks with a SFB license can provide basic banking service of acceptance of deposits and lending.

    Objectives of setting-up an SFB

    • To provide financial inclusion to sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganized sector entities

    Key features of SFBs

    • Existing non-banking financial companies (NBFC), microfinance institutions (MFI) and local area banks (LAB) can apply to become small finance banks.
    • The banks will not be restricted to any region.
    • 75% of its net credits should be in priority sector lending and 50% of the loans in its portfolio must in ₹25 lakh.
    • The firms must have a capital of at least ₹200 crore.
    • The promoters should have 10 years’ experience in banking and finance.
    • Foreign shareholding will be allowed in these banks as per the rules for FDI in private banks in India.

    Back2Basics: Small Payments Bank Vs. Payment Bank

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