Small Finance Banks (SFB)

Small Finance Banks (SFBs), created in 2016, are special banks that focus on helping small businesses and households needing credit. Governed by the Reserve Bank of India, SFBs bring financial services to those who may not otherwise have access, supporting local economies and contributing to overall economic development. They also help distribute insurance products and mutual funds, making finances more accessible for those they serve. In this article, you will learn about what is Small Finance Banks, objective, scope and eligibility criteria of Small Finance Banks, which is an important topic for GS Paper-3 Economy Subject of UPSC IAS Exam. To explore other interesting Economics concepts similar to Small Finance Banks, check out other articles of IASToppers.   

Table of Content

• What are Small Finance Banks (SFB)?
• Objective of Small Finance Banks
• Scope of activities
• Who are the Eligible promoters of Small Finance Banks?
• Eligibility Criteria for Banks
• Difference between Small Finance Banks and Payments Banks
• Conclusion

What are Small Finance Banks (SFB)?

• Also known as finance banks, Small Finance Banks (SFBs) were formed in 2016 after Reserve Bank of India (RBI)’s differentiated bank licencing policy. 
• Their unique structure positions them to serve specific segments of the population, such as small businesses and households in need of credit.
• They are private sector banks that offer limited products to the customer.
• RBI grants Small Finance Banks certain privileges, such as offering lower interest rates on loans within their jurisdiction compared to other banks.

Objective of Small Finance Banks

• To expand access to financial services to small business units and unorganized entities in rural and semi-urban areas

Regulation of Small Finance Banks

• SFBs are regulated by the Reserve Bank of India.
• SFBs are registered as a public company under the Companies Act, 2013.
• They are licensed as under Section 22 (1) of the Banking Regulation Act, 1949.

Scope of activities

What Small Finance Banks can do?

• Can undertake all basic banking activities including lending and taking small deposits.
• No restriction in the area of operations.
• Distribute mutual funds, insurance products and other simple third-party financial products.
• Lend 75% of their total adjusted net bank credit to priority sector.
• Maximum loan size would be 10% of capital funds to single borrower, 15% to a group.
• Minimum 50% of loans should be up to 25 lakhs.

What Small Finance Banks cannot do?

• Lend to big corporates and groups.
• Cannot open branches with prior RBI approval for first five years.
• Other financial activities of the promoter must not mingle with the bank.
• Cannot set up subsidiaries to undertake non-banking financial services activities.
• Cannot be a business correspondent of any bank.

Eligibility Criteria for Banks

• Min. Paid Up Capital Rs. 200 Crores
• Must open at least 25 % of its banking outlets in unbanked rural areas
• Promoters minimum initial contribution to above 40%
• Foreign Shareholding as per FDI policy for private banks
• Subjected to all prudential norms and regulations of commercial banks, including maintaining CRR and SLR

Who are the Eligible promoters of Small Finance Banks?

• Resident individuals/professionals with 10 years of experience in banking and finance
• Companies and societies owned and controlled by residents and having successful track record of running their businesses for at least 5 years, 
• Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents and having successful track record of running their businesses for at least 5 years, 
• Desirous Urban Co-operative Bank can convert into SFB voluntarily,
• Promoter/promoter groups should be ‘fit and proper’ with a track record of professional experience or of running their businesses for at least 5 years.

On Tap Licensing Initiative

• The ‘On Tap’ licensing initiative by the RBI allows Small Finance Banks to grow faster and offer better customer services.
• Eligibility criteria for tap licensing include a minimum net owned fund of Rs. 300 crores and a minimum paid-up capital of Rs. 100 crores.

Transition

• Transition from SFB to Universal Banks: SFB willing to transit into a universal bank has to fulfil minimum paid-up capital / net worth requirement as applicable to universal banks.
• In 2018, RBI allowed Primary (Urban) Co-operative Banks (UCBs) to voluntarily become SFB after fulling several criteria.

Difference between Small Finance Banks and Payments Banks

List of Small Finance Banks in India

1. Au Small Finance Bank Limited
2. Capital Small Finance Bank Limited
3. Equitas Small Finance Bank Limited
4. Suryoday Small Finance Bank Limited
5. Ujjivan Small Finance Bank Limited
6. Utkarsh Small Finance Bank Limited
7. ESAF Small Finance Bank Limited
8. Fincare Small Finance Bank Limited
9. Jana (Janalakshmi) Small Finance Bank Limited
10. North East Small Finance Bank Limited
11. Shivalik Small Finance Bank Limited
12. Unity Small Finance Bank Limited

Conclusion

Small Finance Banks (SFBs) provides key banking services to underserved sectors such as small businesses, farmers, and unorganized entities. They bridge the gap in financial inclusion, offering a range of services from lending to accepting deposits. However, they are not without limitations, such as restrictions on lending to large corporates and the need for RBI approval to open branches. Moving forward, the Indian government could consider easing some regulatory constraints to allow SFBs to expand their services and reach such as allowing a higher threshold for lending or easing the process for branch expansion.

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