RBI Prescribes Eligibility Norms for Small Finance Banks Dealing in Forex

Posted by Written by Naina Bhardwaj Reading Time: 4 minutes

The Reserve Bank of India (RBI) recently gave its approval for small finance banks to operate in foreign exchange business with Authorized Dealer Category I license. For the same, the central bank has prescribed various eligibility criteria, including minimum net worth of INR 5 billion and minimum two years of operational experience as an Authorized Dealer Category II.

In a recent notification dated August 8, 2022, the Reserve Bank of India (RBI) expanded the scope of operations for a small finance bank by permitting them to operate as an Authorized Dealer Category I in foreign exchange (forex) business. The RBI has also prescribed eligibility criteria for the same. This step will offer more flexibility to such small finance banks to cater to their customers’ forex business requirements.

What are the eligibility criteria for small finance banks to operate as Authorized Dealer Category I?

  • The small finance bank should have completed at least two years of operations as Authorized Dealer Category II.
  • The bank should have been included in the Second Schedule to RBI Act, 1934.
  • It should have a minimum net worth of INR 5 billion.
  • The bank’s Capital to Risk Weighted Assets Ratio (CRAR) should not be less than 15 percent.
  • The net non-performing assets (NPAs) of the bank should not exceed six percent, during previous four quarters.
  • The bank should have made profit in the preceding two years.
  • The bank should not have defaulted in maintenance of cash reserve ratio (CRR)/statutory liquidity ratio (SLR) during previous two years.
  • It should have sound internal control systems and must not have any major regulatory and supervisory concerns.

How can the eligible bank apply for Authorized Dealer Category I license?

The eligible small finance banks can approach the Foreign Exchange Department, Central Office, RBI with their applications along with the supporting documents with regard to their eligibility and other documents as required.

What are the documents required to be furnished along with the application for Authorized Dealer Category I license?

  • A copy of applicant’s banking license issued by Department of Regulation, RBI; and
  • Necessary Board resolution for conducting the activities permitted to an Authorized Dealer Category I and for obtaining necessary authorization from the RBI under section 10(1) of Foreign Exchange Management Act (FEMA), 1999.

What are small finance banks?

A small finance bank is a bank registered as a public limited company under the Companies Act, 2013. It is licensed under Section 22 of the Banking Regulation Act, 1949 and governed by the provisions of the Banking Regulation Act, 1949; RBI Act, 1934; FEMA, 1999, and other relevant statutes. They are set up primarily for furthering financial inclusion by:

  • Provision of savings vehicles primarily to unserved and underserved sections of the population.
  • Supply of credit to small business units, small and marginal farmers, micro and small industries, and other unorganised sector entities, through high technology-low cost operations.

These small finance banks will be given scheduled bank status immediately upon commencement of operations.

Scope of activities undertaken by small finance banks

The primary responsibility of a small finance bank is to undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections. However, the RBI has also authorized them to undertake other non-risk sharing simple financial services activities, such as distribution of mutual fund units, insurance products, pension products, etc. with the prior approval of the RBI and after complying with the requirements of the sectoral regulator for such products. The small finance bank can also become a Category II and Category I Authorized Dealer in forex business for its clients’ requirements. However, it must be noted that such an entity cannot set up subsidiaries to undertake non-banking financial services activities.

It is mandatory for a small finance bank to use the words “Small Finance Bank” in its name in order to differentiate it from other banks.

What are the capital requirements for a small finance bank?

The minimum paid-up equity capital for small finance banks shall be INR 2 billion. For primary (urban) co-operative banks willing to voluntarily transition into small finance banks, the initial requirement of net worth shall be at INR 1 billion, which will have to be increased to INR 2 billion within five years from the date of commencement of operations.

Who are authorized dealers?

Authorized dealer refers to any financial institution, which has received authorization from the RBI to operate as a dealer involved in trading of foreign currencies.

Categories of authorized dealers in India

Category of authorized dealers

Qualifying entities


Authorized Dealers Category I

·         All commercial banks and scheduled banks registered under RBI Act.

·         Urban Co-operative Banks

·         Small finance banks (subject to eligibility)

It deals in all types of current and capital account transaction according to the norms and procedures laid down by RBI.

Authorized Dealers Category II

Upgraded full-fledged money changer, including additional inclusions like Department of Post and various type of non-banking financial institutions operating in open market.

It deals in non-trade forex transactions.

Authorized Dealers Category III

Financial institutions, EXIM Bank, SIDBI, IFCI, and various factoring agents.

It deals with the activities that are incidental to financing of international trade related activities undertaken by these institutions.

Full Fledged money Changer (FFMC)

It can be any entity which is related to the finance sector including NBFCs, Department of Post etc.

FFMCs are authorized to purchase forex from resident and non-resident visiting India and to sell it for certain approved purposes.


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