What is a Small Finance Bank?

Small Finance Banks (SFBs) are specialised financial institutions established with the primary goal of fostering financial inclusion by offering basic banking services to underserved and unbanked segments of society. Regulated by the Reserve Bank of India (RBI), SFBs bridge the financial gap in rural and semi-urban areas, focusing on small business units, micro and small industries, marginal farmers, and unorganized sectors.

In this article, we'll explore the concept, functioning, products, and significance of Small Finance Banks, highlighting their role in shaping the financial landscape of India.

Understanding Small Finance Banks (SFBs)

A Small Finance Bank is a type of banking institution conceptualized and regulated by the RBI to provide basic banking services in areas lacking access to financial facilities. The concept was introduced in the 2014-15 Union Budget, and the RBI issued detailed guidelines in November 2014. By November 2015, 10 entities were granted SFB licenses, including prominent names like AU Small Finance Bank.

Objectives of Small Finance Banks

1. Financial Inclusion: Serve unbanked and underbanked regions.
    
2. Empower Marginalised Groups: Extend banking services to small business units, marginal farmers, and unorganised sectors.
    
3. Rural and Semi-Urban Focus: Strengthen access to credit in tier-3, tier-4 towns, and rural areas.

Key Features of Small Finance Banks

1. Regulated by the RBI: Operate under the RBI’s Banking Regulation Act, 1949, and other relevant regulations.
    
2. Basic Banking Services: Offer savings accounts, current accounts, fixed deposits (FDs), recurring deposits (RDs), and loans.
    
3. Scheduled Bank Status: SFBs receive this status upon meeting specific criteria under the RBI Act, 1934.
    
4. Focus on Priority Sectors: At least 75% of their Adjusted Net Bank Credit (ANBC) is allocated to priority sectors like agriculture and small-scale industries.
    
5. Capital Requirements: Minimum paid-up capital is ₹200 crore, ensuring financial stability.
    
6. No Subsidiaries Allowed: SFBs cannot establish subsidiaries for non-banking financial services.

How Small Finance Banks Work

Small Finance Banks operate similarly to traditional banks but with a focus on inclusivity and simplicity:

1. Acceptance of Deposits: Savings and Current Accounts, along with Fixed and Recurring Deposits. NRIs can also open Savings and FD accounts via SFBs.
    
2. Credit Facilities: Loans to small businesses, micro-enterprises, and marginalised farmers. SFBs also offer vehicle financing and Home Loans at affordable rates.
    
3. Other Services: With RBI approval, SFBs can distribute mutual fund units, insurance, pension products, and even offer forex services.
    
4. Rural Outreach: A mandatory 25% of branches are located in rural, unbanked areas to promote financial penetration.

Products and Services Offered by SFBs

1. Savings Accounts: Basic deposit accounts tailored for low-income earners.
    
2. Current Accounts: Accounts designed for businesses and professionals.
    
3. Loan Products: Inclusive credit options for small businesses, farmers, and individuals. Vehicle loans (bike loan and electric vehicle loans) and home loan financing options are also available.
    
4. Fixed and Recurring Deposits: Secure investment options with competitive interest rates.
    
5. Insurance and Mutual Funds: Non-risk-sharing financial services under regulatory approval.

Role of Small Finance Banks in India

1. Enhancing Financial Inclusion

   SFBs are crucial in extending banking services to underserved populations, especially in rural and semi-urban areas.

    

2. Empowering Small Businesses

   By providing credit to small businesses and entrepreneurs, SFBs contribute to local economic growth and job creation.

    

3. Promoting Savings Habits

   With accessible deposit schemes, these banks encourage savings among low-income groups.

Regulation and Governance of Small Finance Banks

SFBs are governed by:

• Banking Regulation Act, 1949
• RBI Act, 1934
• FEMA, 1999
• Credit Information Companies (Regulation) Act, 2005

RBI ensures that SFB promoters meet the "fit and proper" criteria, maintaining transparency and integrity in their operations.

Difference Between Small Finance Banks and NBFCs

The Future of Small Finance Banks

With advancements in digital banking and financial literacy, SFBs are poised to expand their reach and impact. Their ability to transition into universal banks offers them the flexibility to scale operations and innovate further.