Introduction
Small Finance Banks (SFBs) have come into being as critical entities in India’s developing financial system. With the objective of catering to particular underserved segments, they are expected to provide financial services to the unbanked and marginalized groups.
What are Small Finance Banks (SFBs)?
Small Finance Banks (SFBs) are specialized financial institutions authorized by the Reserve Bank of India (RBI) to offer core banking services to under-banked and unbanked sections of society. They are a type of Differentiated Bank, i.e., they are working with predefined objectives and customer sets, in contrast to universal commercial banks.
Key Characteristics of SFBs:
- Registered as Public Limited Companies under the Companies Act, 2013.
- Licensed under Section 22 of the Banking Regulation Act, 1949.
- Can perform all fundamental banking activities such as acceptance of deposits and lending.
- Emphasis is on small and marginal farmers, micro and small enterprises, and the unorganised sector.
Understanding Differentiated Banks in India
Differentiated Banks are license-banking entities allowed to operate within a particular niche. The concept was mooted by the Nachiket Mor Committee (2013) to promote greater financial inclusion by serving particular customer needs and business models.
Types of Differentiated Banks:
- Small Finance Banks (SFBs)
- Payment Banks
The banks offer bespoke services instead of universal banking and assist in establishing a more inclusive financial system.
Objectives of Small Finance Banks
The formation of SFBs serves several critical goals aimed at inclusive development:
| Objective | Details |
|---|---|
| Access to Financial Services | Expand banking services to far-off rural and semi-urban villages. |
| Basic Banking for the Underserved | Make saving and lending facilities available to small farmers, micro enterprises. |
| Foster Financial Inclusion | Target unorganized and informal segments, providing universal banking access. |
| Create Alternative Institutions | Provide a substitute to large banks in rural regions in addition to helping MSMEs. |
Features of Small Finance Banks
Small Finance Banks, while being small in terms of their operations when compared to fully functioning commercial banks, are designed to offer nearly all basic banking services. Certain of the significant characteristics are:
- Deposit Services:
- Receive all kinds of deposits (CASA, fixed deposits, recurring deposits).
- Lending Services:
- Grant loans, primarily to the unserved, keeping ticket sizes low up to ₹25 lakhs.
- Non-Risk Financial Services:
- Permitted to disburse third-party products such as mutual funds, insurance, and pensions.
- Target Customers:
- Marginal and small farmers
- Micro and small businesses
- Unorganised sector units
- Focus on Lending & Deposits:
- Core banking activities with model-simplified concepts.
Regulatory Framework for Small Finance Banks
SFBs are regulated under a mix of company and banking laws to be safe, transparent, and inclusive.
| Aspect | Regulatory Provision |
|---|---|
| Registration | Companies Act, 2013 |
| Licensing | Section 22 of the Banking Regulation Act, 1949 |
| Supervision | RBI, Banking Regulation Act, 1949 and RBI Act, 1934 |
| Capital Adequacy | Minimum Capital Adequacy Ratio (CAR) of 15% on a persistent basis |
| Net Worth Requirements | Minimum ₹100 crore initially; ₹200 crore to be reached within 5 years |
| Rural Penetration Mandate | 25% of branches must be in rural areas |
| Lending Norms | 50% of the loans should be lent to the MSME sector |
Differences Between Small Finance Banks and Payment Banks
While SFBs and Payment Banks both come under the category of differentiated banks, they are much broader in terms of scope, operation, and service provision.
| Criteria | Small Finance Banks (SFBs) | Payment Banks |
|---|---|---|
| Registration and Licensing | Registered under the Companies Act and licensed under the Banking Regulation Act, 1949 | Registered under the Companies Act, 2013 and licensed under the Banking Regulation Act, 1949 |
| Eligibility | Resident Individuals, Private Companies, Societies, NBFCs, MFIs, Local Area Banks | PPI Providers, Resident Individuals, NBFCs, Telecom Firms, Supermarkets, Public Sector Entities |
| Minimum Capital Requirement | ₹100 Crores (to be increased to ₹200 Crores within 5 years) | ₹100 Crores |
| FDI Allowed | Yes, up to 74% | Yes, up to 74% |
| Accept Deposits | Yes (CASA, FD, RD) | Yes (Only Demand Deposits) |
| Restrictions on Deposits | No Restrictions | Up to ₹1 Lakh |
| Deposit Insurance | Yes (Covered under DICGC) | Yes (Covered under DICGC) |
| Can Lend Loans | Yes, at least 50% of loans must be up to ₹25 lakh | No |
| Issue Debit/Credit Card | Both Debit and Credit Cards can be issued | Only Debit Cards, no Credit Cards |
| SLR and CRR Applicable | Both CRR and SLR Applicable | CRR Applicable; SLR: 75% of NDTL |
| BASEL Norms | Yes, 15% of Risk Weighted Assets (RWAs) | Yes, 15% of Risk Weighted Assets (RWAs) |
| Priority Sector Lending (PSL) | Mandatory; Target: 75% of ANBC | Not Applicable |
Significance of Small Finance Banks in India
Small Finance Banks are not just monetary institutions but are agents of socio-economic change, especially in underpenetrated areas.
Major Contributions:
- Financial Deepening:
- Getting millions into the formal banking fold by concentrating on distant areas and informal economy.
- Entrepreneurial Promotion:
- Drive growth for MSMEs, artisans, and agripreneurs by providing inexpensive credit.
- Building Banking Habits:
- Enhance savings and investment behavior in low-income segments.
- Innovation and Competition:
- Launch new-generation digital solutions and enhance competition in the banking space.
- Empowering Women and SHGs:
- Numerous SFBs offer financial services designed specifically for women entrepreneurs and Self-Help Groups.
Examples of Small Finance Banks in India
Some institutions have evolved from being microfinance or NBFC organizations into full-fledged Small Finance Banks:
| Bank Name | Headquarters | Origin |
|---|---|---|
| Ujjivan SFB | Bengaluru, Karnataka | Ujjivan Financial Services |
| AU SFB | Jaipur, Rajasthan | AU Financiers (India) Ltd |
| Jana SFB | Bengaluru, Karnataka | Jana Lakshmi Financial Services |
| Utkarsh SFB | Varanasi, Uttar Pradesh | Utkarsh Micro Finance Ltd |
| Equitas SFB | Chennai, Tamil Nadu | Equitas Holdings Ltd |
Challenges Faced by SFBs
In spite of their success, Small Finance Banks also have some challenges:
- Limited reach as compared to big commercial banks.
- Increased cost of operations in rural and semi-urban areas.
- Burden of compliance owing to twin regulations under the Companies Act and RBI regulations.
- Scalability concerns due to their focused customer base.
Conclusion
Small Finance Banks (SFBs) are now an integral component of India’s financial landscape. By reaching out to the unbanked and underserved, and prioritizing micro-lending and savings mobilization, they foster inclusive growth, deepen financial penetration, and facilitate grassroots empowerment. With these institutions growing more mature and larger, their role in creating a financially inclusive and economically empowered India is all poised to become even more central.
FAQs on Small Finance Banks
Q1. Are SFBs allowed to issue credit cards?
Yes, Small Finance Banks are allowed to issue credit and debit cards.
Q2. Are SFBs insured under deposit insurance?
Yes, deposits in SFBs are insured up to ₹5 lakhs under DICGC.
Q3. Who can establish an SFB?
The entities eligible are NBFCs, MFIs, Local Area Banks, Resident Individuals, and Private Companies.
Q4. Are SFBs traded on the stock exchange?
A few SFBs such as AU Small Finance Bank and Ujjivan SFB are listed on Indian stock exchanges.
Q5. Can SFBs be PAN-India?
Yes, but they have to maintain 25% rural branch presence and adhere to lending norms.
