Small Finance Bank In India: Overview, Lists & Eligibility

Small Finance Banks

Small Finance Banks (SFBs) are specialized financial entities operating in India, with a primary focus on offering basic banking and financial services to underserved and unbanked segments of the population, particularly in rural and semi-urban regions. These banks play a pivotal role in the government’s initiatives to foster financial inclusion and expand banking facilities across the nation. Understanding the characteristics and functions of Small Finance Banks is crucial for aspirants preparing for banking awareness sections, and this comprehensive information aims to fulfill their needs.

History of Small Finance Banks

Small Finance Banks (SFBs) are a special kind of banks in India. When a bank has an SFB license, it can do basic banking activities like taking deposits from people and giving out loans. Here is a brief history of Small Finance Banks in India.

1. In July 2014, the Reserve Bank of India (RBI) made initial guidelines for small finance banks and asked for feedback from the public.
2.  In November 2014, the final rules for small finance banks were issued by RBI.
3.  Interested organizations had to apply by January 2015.
4. In February 2015, RBI listed 72 groups that applied for a small finance bank license.\
5. An advisory committee led by Usha Thorat was set up to evaluate the applications.
6.  By September 2015, RBI gave temporary licenses to ten groups, mainly microfinance NBFCs, to become small finance banks within a year.
7.  Capital Small Finance Bank became the first to start, opening branches in April 2016.
8. In April 2021, RBI approved Shivalik Mercantile Co-operative Bank to become India’s first urban co-operative bank to transform into a Small Finance Bank.

Acts Applicable On Small Finance Banks

The small finance bank shall be registered as a public limited company under the Companies Act, 2013. The following acts apply to Small Finance Banks.

• It will be licensed under section 22 of Banking Regulation Act, 1949
• Foreign Exchange Management Act, 1999
• Reserve Bank of India Act, 1934
• Payment & Settlement Systems Act, 2007
• Credit Information Companies (Regulation) Act, 2005
• Deposit Insurance and Credit Guarantee Corporation Act, 1961

Small Financial Banks and Objectives

Here are the objectives of establishing Small Finance Banks in India. The candidates must remember these points for use in descriptive answers and essays.

1. Financial Inclusion: Small Finance Banks (SFBs) strive to advance financial inclusion by serving the requirements of small business enterprises, small and marginalized farmers, micro and small-scale industries, as well as entities operating in the informal sector.
2. Savings Options: Providing savings options mainly to those who currently lack them.
3. Credit Support: Offering loans to small businesses, farmers, micro and small industries, and unorganized sector entities.
4. Alternative Institution: Small finance banks possess the capability to offer an alternative to certain established institutions, given their specific emphasis on catering to small and medium enterprises, the informal sector, as well as small and marginalized farmers. This strategic focus aims to bolster financial inclusion efforts and cater to diverse underserved clientele in rural areas, as well as tier three and four cities and towns.
5. High-Tech, Low-Cost Approach: Using advanced technology to keep operations efficient and costs low.

Regulatory Provisions Related To Small Finance Banks

Here are a few regulatory guidelines as released by the Reserve Bank of India. The points below will help candidates to know who can apply for Small Finance Bank.  Here are a few regulatory provisions related to Small Finance Bank In India.

1. Existing NBFCs, MFIs, and LABs can become small finance banks.
2. They can be promoted by individuals, corporates, trusts, or societies.
3. Established as public limited companies under the Companies Act, 2013.
4. Governed by RBI Act, 1934, Banking Regulation Act, 1949, and relevant laws.
5. No regional restrictions.
6. Aim to promote rural savings and provide credit for local economic activities.
7. 75% of net credits in priority sector lending, 50% of loans in ₹25 lakh range.
8. Minimum paid up capital requirement of ₹200 crore.
9. Promoters need 10 years of banking and finance experience.
10. The initial promoter stake is 40%, reduced to 15% in 15 years from the date of commencement of business of the bank.
11. No joint ventures or foreign shareholding is allowed as per FDI rules.
12. Mandatory listing within three years at a net worth of ₹500 crore, voluntary below that.

Guidelines Of RBI Related To Operations Of Small Finance Banks

Here are a few guidelines issued by RBI, that oversee the operational aspects of Small Finance Banks. The candidates must note that like any other banks, some provisions like CRR etc. apply to Small Finance Banks.