What are Small Finance Banks?

Small Finance Banks (SFBs) are financial institutions based on the principles of microcredit. These types of banks in India provide credit to individuals who would otherwise not have access to traditional banking services due to their low income. As a result, SFBs allow people to start businesses and invest in projects they may not otherwise be able to afford. Difference Between a Small Finance Bank and a Commercial Bank Asian Development Bank

What is the primary objective of a Small Finance Bank?

Micro-enterprises and small businesses are the primary targets of Small Finance Bank. SFBs are generally considered banks with less than $50 million in assets and offer only essential banking products and services. However, some SFBs may have larger asset bases and still operate under the same regulatory framework as smaller banks. Bank Rate World Bank

What is on tap licensing of Small Finance Banks?

On-tap licensing of Small Finance Banks is a regulatory regime where licensed financial institutions (LFS) can provide financial services to customers without having to obtain a separate license for each customer . On-tap licensing is a relatively recent innovation in the financial sectors of the Indian economy . In Australia, the first LFS licenses were issued in April 2017.

What are the criteria for licensing Small Finance Banks?

Critical Criteria for Licensing Small Finance Banks. The Reserve Bank of India has laid down certain conditions for licensing SFBs . These include: A minimum paid-up capital of Rs 1 crore. The minimum net worth of Rs 50 lakh. No proprietary interest in the business activity of the bank. At least 25% of its total assets shall be in cash and investments.

Does the RBI regulate Small Finance Banks?

Yes. The Reserve Bank of India regulates all financial institutions, including microfinance banks . Microfinance banks are non-banking financial companies that provide loans to individuals at affordable rates. These banks have been granted permission to operate under Section 45AA of the Banking Regulation Act 1949.

How many Small Finance Banks in India?

As of 2023, there are 12 Small Finance Banks in India . These banks provide lending facilities to SMEs and MSMEs , small industries, small businesses, unorganized sectors, and other underserved sections in India. The number of SFBs can increase in the coming years.

How do Small Finance Banks operate in India?

Small Finance Banks are involved in basic banking activities of deposits and acceptance and lend money to unserved and underserved sections such as small businesses, marginal farmers, small industries, micro industries, and unorganized sectors of India.

How safe are Small Finance Banks in India?

When compared to larger scheduled commercial banks in India, Small Finance Banks tend to be riskier . Investors must go through the risk profile. Investors should be aware of these risks, and invest in line with their investment objective.

What is the difference between a Small Finance Bank and a Commercial Bank?

Small finance banks target customers, whereas commercial banks do not place restrictions on the clients they serve. This is the main distinction between these two small finance banks and commercial banks.

What is the dfifference between Small Finance Bank and Payment Bank?

The main distinction between a small financing bank and a payment bank is that the Small Finance Bank offers financial services to underserved and unbanked communities , while the latter runs on a smaller scale without taking on any credit risk.

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Small Finance Bank in India – List, Functions, Meaning, SFB UPSC

By BYJU'S Exam Prep

Updated on: November 14th, 2023

Small Finance Banks (SFBs) are banks that have limited financial resources and are regulated by the Reserve Bank of India. The objective of SFBs is to provide loan services to the unorganized sector, including households, micro-businesses, and small manufacturing units. Small Finance Banks were introduced in India to increase credit penetration into this segment.

In recent years, significant efforts have been made by the government towards promoting growth in this sector through various initiatives such as a tap licensing scheme for Small Finance Banks; setting up a mechanism called SIDBI (Small Industries Development Bank of India) under CSO control, etc. In this article, we have covered all about Small Finance Bank in India such as their functions, features, objectives, and list of all the SFBs in India.

Table of content

1. What is Small Finance Bank?
2. List of Small Finance Banks in India
3. Need of Small Finance Banks (SFBs)
4. History of Banking Regulations in India
5. Objective of Small Finance Banks
6. Tap Licensing of Small Finance Banks
7. Criteria for Licensing Small Finance Banks
8. Payments Banks vs Small Finance Banks
9. Small Finance Banks UPSC

What is Small Finance Bank?

Small Finance Banks (SFBs) are commonly known as finance banks. Small Finance Banks are regulated by the Reserve Bank of India (RBI), meaning they must follow specific rules and regulations. Small Finance Banks are not-for-profit organizations owned by the government or state governments, who also own all other commercial banks in India.

Small Finance Banks UPSC Notes

The Reserve Bank of India gives the Small Finance Banks special privileges, such as lower interest rates than other banks can offer their customers regarding loans made within their jurisdiction (this allows them access). Small Finance Banks are not allowed to lend money to large corporations; they can only lend money to small businesses. It was done by the government so that these types of financial institutions would not compete for the same customers as commercial banks.

List of Small Finance Banks in India

There are many Small Finance Banks working currently in India. The number of SFBs has increased over the years, and here is a list of some of the important SFBs in India.

Capital Small Finance Bank (India’s first small finance bank)

Capital Small Finance Bank (formerly Capital Local Area Bank Ltd) is India’s first small finance bank that started its banking operations in April 2016 in Jalandhar, Punjab.
The bank got its license as a Small Finance Bank from the Reserve Bank of India (RBI) in March 2016.
Managing Director of Capital Small Finance Bank: Sarvjit Singh Samra
Headquarters of Capital Small Finance Bank: Jalandhar, Punjab.
Tagline: Vishwas Se Vikas Tak

Equitas Small Finance Bank

Formerly Equitas Holdings P Limited started its banking operations with 3 branches in Chennai in September 2016. The bank got its license as a Small Finance Bank from the Reserve Bank of India (RBI) in July 2016.

PN Vasudevan is the Managing Director & CEO of Equitas Small Finance Bank.
Headquarters of Equitas Small Finance Bank – Chennai, Tamil Nadu.
Tagline – It’s Fun Banking

Utkarsh Small Finance Bank

It was formerly known as Utkarsh Micro Finance
It started its operations with five branches across Varanasi, Patna, Delhi-NCR, and Nagpur in January 2017.
The bank got its license as a Small Finance Bank from the Reserve Bank of India (RBI) in November 2016.
Govind Singh is the Managing Director & CEO of Utkarsh Small Finance Bank.
Headquarters of Utkarsh Small Finance Bank: Varanasi, UP
Tagline: Apki Umeed Ka Khata

Suryoday Small Finance Bank

Formerly Suryoday Micro Finance Ltd) started its banking operation in January 2017 in Belapur, Navi Mumbai. The bank got its license as a Small Finance Bank in November 2016.

Baskar Babu Ramachandran is the Managing Director & CEO of Suryoday Small Finance Bank.
Headquarter of Suryoday Small Finance Bank: Belapur, Navi Mumbai.
Tagline: A Bank of Smiles.

Ujjivan Small Finance Bank

A subsidiary of Ujjivan Financial Services Ltd) started its banking operations in February 2017 in Bengaluru, Karnataka. The bank got its license as a Small Finance Bank in November 2016.

Samit Ghosh is the Managing Director & CEO of Ujjivan Small Finance Bank.
Headquarter of Ujjivan Small Finance Bank: Koramangala, Bengaluru, Karnataka.
Tagline: Bharosa, Aap Ke Bharose Par

ESAF Small Finance Bank

It was formerly known as ESAF Microfinance and Investments Private Ltd.

It started its banking operations in Thrissur, Kerala in March 2017.
The bank got its license as a Small Finance Bank from the Reserve Bank of India (RBI) in November 2016.
Headquarter of ESAF Small Finance Bank: Thrissur, Kerala.
ESAF will be the first bank to be given a banking license in Kerala since its independence.
Tagline: Joy of Banking

Note: On 28 Dec 2018, Esaf Small Finance Bank received the Reserve Bank approval to operate as a scheduled bank.

AU Small Finance Bank

It started its banking operation as a Small Finance Bank in April 2017.
The bank got its license in December 2016.
Sanjay Agarwal is the Managing Director & CEO of Au Small Finance Bank.
Headquarter of Au Small Finance Bank: Jaipur, Rajasthan.
Tagline: Chalo Aage Badhe

Fincare Small Finance Bank

It was previously known as Disha Microfin Limited and started its banking operations in September 2017, with about 25 operational branches across Gujarat, Tamil Nadu, Karnataka, and Andhra Pradesh.
Rajeev Yadav is the Managing Director & CEO of Fincare Small Finance Bank.
Headquarters: Bengaluru, Karnataka.
Tagline: Banking on More.

North East Small Finance Bank

The Rashtriya Gramin Vikas Nidhi Microfinance Limited-North East (RGVNMFL-NE), the promoter of North East Small Finance Bank, got the license of Small Finance Bank from the Reserve Bank of India (RBI) in March 2017.
MD: Rupali Kalita
Headquarters of North East Small Finance Bank: Guwahati, Assam.
Tagline: Your DoorStep Banker

Jana Small Finance Bank

Established: March 2018.
Headquarters of Jana Small Finance Bank: Bengaluru
Tagline: Paise Ke Kadar
MD & CEO: Ajay Kanwal

Need of Small Finance Banks (SFBs)

Small Finance Banks are banks that lend to small businesses and individuals. They are regulated by the Reserve Bank of India (RBI), meaning they must follow specific rules set by RBI. The Reserve Bank of India introduced the small finance bank policy in 2015 to provide credit to the unserved and underserved population. Some critical criteria for licensing Small Finance Banks include a minimum paid-up equity capital of Rs.100 crores, the net worth of the bank, and geographical remoteness. To tap into this potential market, the RBI has granted similar licenses to several Small Finance Banks.

History of Banking Regulations in India

The Reserve Bank of India (RBI) has been the regulator for banks in India since 1949. In the 1960s, the RBI gave special privileges to small banks and not-for-profit organizations. In 2015, the RBI granted licenses to 10 Small Finance Banks. These banks are regulated like any other banks in India. They can only accept deposits from individuals and small businesses.

Objective of Small Finance Banks

Small Finance Banks (SFBs) are financial institutions licensed to provide banking services to the unserved and underserved population. They offer a range of products, including savings accounts, fixed deposits, and term loans to farmers.

The primary objective of SFBs is to provide a convenient, safe, and efficient banking service for their customers who cannot access mainstream financial institutions due to geographical remoteness or socio-economic disadvantage.
They also provide credit to the unserved and underserved population, with a primary focus on farmers. However, they often cannot access mainstream financial institutions due to geographical remoteness or socio-economic disadvantage.

The Reserve Bank of India (RBI) regulates SFBs, and licensing is on tap. Critical criteria for licensing include a minimum net worth of Rs 100 crore and a maximum foreign investment cap of 74 percent. The government has also issued mobile banking guidelines, allowing customers to use their mobile phones as credit or debit cards.

Tap Licensing of Small Finance Banks

On Tap is an initiative by the Reserve Bank of India (RBI) that allows Small Finance Banks to grow faster and offer better customer services. The RBI has decided that all new applicants for permission to set up a new bank should be eligible for an On Tap license from January 1, 2019. It means that if you are planning to start an SFB or apply for one later this year, it will be beneficial for your business if you have an existing relationship with us, as we can help expedite your application process based on our experience in granting similar licenses earlier. On Tap licensing is valid from January 1, 2019, onwards. The RBI will issue a circular announcing specific dates of each year when applications can be submitted.

Eligibility Criteria For Tap Licensing

The applicant should be a Limited Company incorporated in India under the Companies Act 2013. It should have a minimum net owned fund of Rs. 300 crores and a minimum paid-up capital of Rs. 100 crores. It should also have at least 25% of the promoters’ contribution (both tangible and intangible) towards net worth or paid-up capital

Criteria for Licensing Small Finance Banks

To be eligible for a small finance bank license, entities should fulfill the following conditions:

The banks can only accept deposits from residents and residents of Bhutan, Nepal, Myanmar, and Pakistan.
They must have a minimum paid-up equity capital of Rs.100 crores.
They must be in existence for at least five years.

Payments Banks vs Small Finance Banks

Payments Banks and Small Payments Banks are licensed entities of RBI, and India’s central bank monitors their operation and direction. However, they differ in many ways. Definition:

Payments banks are similar to commercial banks but operate at small scales, excluding credit risks. They perform maximum banking functions but do not issue credit cards and advance loans.
On the contrary, Small Finance Banks are financial institutes that aim to provide financial aid to deprived sections with fundamental banking operations.

Purpose:

The main objective of establishing the payments banks is to expand financial inclusions by offering minor savings accounts. Also, they aim to provide payment facilities to emigrant laborers, low-earning families, small enterprises, and many other unorganized bodies.
The main objective of establishing Small Finance Banks is the extension of financial inclusions by supplying credits to small enterprises, micro & small farmers and industries, and many other unorganized organizations.

Statistical Number:

Six Payments banks are currently active in India till December 2021. Some well-known Payment banks are NSDL Payments Bank, Airtel Payments Bank, etc.
On the other side, India has 11 Small Finance Banks till December 2021. Capital Small Finance Bank and FINCARE Small Finance Bank are among India’s well-known Small Finance Banks.

Operative Scopes:

The Payments Banks perform activities such as issuing ATM or Debit Cards and providing mobile banking services. They do not issue credit cards.
However, Small Finance Banks perform all the fundamental activities only for underprivileged sections.

Time Deposits:

The Payments Banks do not provide time deposit services like FD and RD.
In contrast, Small Finance Banks provide both FD and RD services.

Read: Difference Between Small Finance Bank and Payment Bank

Small Finance Banks UPSC

The topic of Small Finance Banks is important for the UPSC exam because it falls under the Indian Economy syllabus for UPSC, which is an important component of General Studies. UPSC aspirants are expected to have a comprehensive understanding of the banking sector in India and the initiatives taken by the government to promote financial inclusion. Questions related to the functioning of SFBs, their objectives, and their impact on the Indian economy can be expected in the Civil Service Exam. Therefore, a comprehensive understanding of the topic is essential for aspirants.

Small Finance Banks UPSC Questions

Question 1: Which is the first-ever Small Finance Bank established in India? options- Capital Small Finance Bank, FINCARE Small Finance Bank, ESFA Small Finance Bank, Equitas Small Finance Bank

Answer: Capital Small Finance Bank

Question 2: Which of the following operations are undertaken by Small Finance Banks? Options- Accepting deposits, disturbing small loans, selling insurance products, all of these

Answer: All of These

Question 3: Small Finance Banks can offer Which type of loan? options: (a)Personal loans, (b)Housing loans (c)Consumer loans, (d)Auto loans, (e)All of These