Are Small Finance Banks really that small?

27 Jul 2022  Read 496 Views

Millions of people and small business units exist in the vast expanse of our country. Therefore, it is incredibly challenging for the Government to extend formal banking services to every corner of India. This situation deprives the majority of the Indian populous of the benefits of formal banking.

As a measure of financial inclusion, the Government has introduced the concept of small banks to reach out to locations that are beyond the areas of formal banking. The aim is to provide the people living in remote areas with services like bank credit and savings.

Why were Small Finance Banks created?

Small Finance Banks were created as a measure of financial inclusion. The purpose of small finance banks is to bring the population outside the gambit of banking under the umbrella of basic banking.

Some reasons for their creation are as follows:

  • Cater to the MSME segment – These banks cater to the micro, small and medium enterprises, the agricultural sector and the unorganised sector of business.
  • Provide Basic Banking – These banks accept deposits, offer loans to the organised sector, and function like commercial banks.

Objectives of Small Finance Banks

The prime objective behind the small finance banks is to reach out to approximately 90% of micro and small business units deprived of the benefits of banking.

With the objective mentioned above, the Government of India issued regulations for Small Finance Banks after the Union Budget was placed in 2014. They are entities registered under the Companies Act 2013 as Public Limited Companies.

Who are eligible to start Small Finance Banks?

The entities that wish to start small finance banks need to fulfil the following eligibility criteria:

  • The promoter has to be a resident Indian.
  • The promoter needs to have an experience of at least ten years in the banking and finance industry.
  • Non-banking financial companies, microfinance companies and local area banks (LAB) may convert their operations into small finance banks.
  • Urban cooperative banks may also convert themselves into small finance banks.

Apart from the above eligibility criteria, a detailed study of the promoters' past loan repayment track record is put under the scanner to ascertain their credit worthiness. The promoters should be able to furnish a clean performance track record of at least five years.

What are the characteristic features of a small finance bank?

  • Small finance banks require a lead time of 3 years before expanding their branch network.
  • The focus areas of operation for small finance banks are accepting deposits and lending money to the needy segment.
  • Small finance banks cannot form non-banking financial companies as wholly owned subsidiaries.
  • Per the Reserve Bank of India guidelines, small finance banks must maintain their Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)
  • A small finance bank's minimum paid-up capital must be Rs. 100 crores.
  • The name of the bank must have “Small Finance Bank” in it.
  • 25% of the branches of small finance banks must be in areas which do not have banks.
  • Small finance banks cannot function as business correspondents of other banks.
  • However, small finance banks may appoint their network of business correspondents.
  • Small finance banks may take up the distribution of products like mutual funds, pension and insurance products as additional sources of revenue.
  • Small business banks may take up a dealership of foreign exchange.
  • In case the promoters of the bank have other non-banking lines of business, the same must be kept separate from their activities relating to small finance banks.

Which provisions regulate Small Finance Banks?

Small finance banks have to comply with several rules and regulations. The Acts that govern small finance banks' function are:

  1. Banking Regulation Act, 1949
  2. Reserve Bank of India Act, 1934
  3. Credit Information Country (Regulation) Act, 2005
  4. Deposit Insurance and Credit Guarantee Corporation Act, 1961
  5. Foreign Exchange Management Act, 1999
  6. Payment & Settlement Systems Act, 2007

After successful commencement of business, a small finance bank gets the status of a scheduled bank under Section 42 of the Reserve Bank of India Act, 1934.

Which is the first Small Finance Bank in India?

When the sector for small finance banks opened, more than 700 applications were received. Out of which eliminations were made, the total number of small finance banks in India stands at 10.

Capital Small Finance Bank, headquartered in Jalandhar, Punjab, is the first of its kind in India. The bank started its operations in 2016 as a small finance bank. The Chairman of the Bank is Mr Madan Gopal Sharma.

In its erstwhile stage, the entity was called Capital Local Area Bank. It started its operations in 2000. As a local area bank, they were operational in Ludhiana, Jalandhar and Kapurthala. As of now, the Capital Small Finance Bank has a branch network of 76 branches.

What are the Small Finance Banks operational in India?

Following is the list of small finance banks in India:

Name of the SFB

Year of Inception

H.O. Location

AU Small Finance Bank


Jaipur, Rajasthan

Equitas Small Finance Bank


Chennai, Tamil Nadu

ESAF Small Finance Bank


Thrissur, Kerala

Fincare Small  Finance Bank


Ahmedabad, Gujarat

Janalakshmi Small Finance Bank


Bengaluru, Karnataka

Capital Small Finance Bank


Jalandhar, Punjab

North East Small Finance Bank


Guwahati, Assam

Ujjivan Small Finance Bank


Bengaluru, Karnataka

Utkarsh Small Finance Bank


Varanasi, Uttar Pradesh

Suryoday Small Finance Bank


Navi Mumbai, Maharashtra

The Bottom Line

From all our discussions, it is clear that small finance banks are the intended vehicle of formal banking facilities in areas where there are no banks.
In spite of their growing importance for financiers and SMEs, evidence on the use of these various tools by SMEs and how they respond to their needs is currently patchy.

Till we meet again!

About the Author: Rishika Mukherjee | 250 Post(s)

Mukherjee is an avid reader and loves to write as much as read. She is the youngest of all but handles chores like a 50-year-old woman. She takes a lot on her plate and somehow, eerily manages to get the job done. As Hazel Grace stated, she could read a good author's grocery list, and so would Miss Mukherjee. 

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