The rise in the banking system in the country has been phenomenal in the recent past. The various initiatives of the government to ensure the reach of government programs and the banking system to the remotest parts of the country have been taking many roots over the years. Small Finance Banks are part of this initiative of the government that was first started in 2014. Here’s more on Small Finance Banks and their functions.
What are small finance banks?
Small Finance Banks (SFBs) are specialized banks that are licensed by RBI to provide financial services and products to low-income individuals and underserved communities, including microfinance and micro-enterprise services, as well as other basic banking services.
The guidelines for SFBS were introduced in 2014 by RBI and the in-principle approval was given to 10 applicants out of 72 in 2015. The main aim of SFBs is to provide financial inclusion to these segments of the population who are often excluded from the traditional banking system. SFBs help them to have access to financial products such as small loans, savings, insurance, and other basic banking services.
What are the objectives of small finance banks?
The key objectives of the SFBs are.
- Financial Inclusion
SFBs are instrumental in providing necessary access to financial services and products to low-income individuals and underserved communities. They are a good option for the ultimate consumers who are excluded from the traditional banking system.
- Basic Banking Services
SFBs will also provide basic banking services such as savings, deposits, and remittances to people who do not have access to traditional banking services and are therefore left out of the banking network and the economic growth opportunities.
- Poverty Alleviation
The ultimate aim of financial inclusion is to provide equal opportunity of economic benefits to the entire population of the country. Thus, SFB are a good vehicle to contribute to poverty alleviation by providing access to financial services and products to low-income individuals and communities.
SFBs are charged with providing microfinance services, including small loans, to micro-enterprises and low-income households.
- Agricultural Lending
Agricultural lending is an important aspect to meet the needs of this sector. SFBs will aid in providing credit and other financial services to farmers and rural households.
What are the important RBI guidelines of Small Finance Banks in India?
Small Finance Banks (SFBs) in India are regulated by the Reserve Bank of India (RBI). Some of the key guidelines for SFBs include:
- SFBs are granted the scheduled bank status after being operational and are deemed suitable under section 42 of the RBI Act,1934.
- SFBs are required to primarily focus on providing access to financial services to the unbanked and underbanked segments of the population, including small businesses, low-income households, and farmers.
- SFBs are required to maintain a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 15%.
- SFBs are required to extend 75% of their Adjusted Net Bank Credit to Priority Sector Lending.
- SFBs are required to open at least 25% of their total branches in unbanked rural areas.
- The minimum paid-up voting equity capital for small finance banks shall be Rs.200 crore.
- SFBs are required to maintain at least 50% of their loan portfolio as microfinance and advances of up to Rs. 25,00,000.
- SFBs are required to comply with various prudential norms and regulations related to income recognition, asset classification, and provisioning.
- SFBs are encouraged to adopt technology to improve their operational efficiency and reach the target segments.
Top Small finance banks in India
Some of the popular Small Finance Banks in India are mentioned below.
- AU Small Finance Bank Limited
- Capital Small Finance Bank Limited
- Equitas Small Finance Bank Limited
- Suryoday Small Finance Bank Limited
- Ujjivan Small Finance Bank Limited
- Utkarsh Small Finance Bank Limited
- ESAF Small Finance Bank Limited
- Fincare Small Finance Bank Limited
- Jana Small Finance Bank Limited
- North East Small Finance Bank Limited
Difference between payment banks and small finance banks
Payments Banks are also responsible to provide finances at a small scale and are RBI licensed entities. The key differences between the two are discussed hereunder.
|Category||Payments Banks||Small Finance Banks|
|Meaning||Payments Bank is a type of specialized bank that provides limited banking services such as deposit accounts, remittances, and issuing debit cards. The main objective of Payments Banks is to increase financial inclusion by providing basic banking services to unbanked and underbanked segments of the population.||Small Finance Bank is a type of specialized bank that provides financial services, including loans, to micro-enterprises and low-income households. The main objective of Small Finance Banks is to provide affordable credit and other financial services to underserved and unserved sections of the population.|
|Purpose||The main objective of Payments Banks is to establish them in increasing the efforts of financial inclusion and offering minor savings accounts. The target customer groups for these banks include immigrant labours, low-earning families, small enterprises, and many other unorganised bodies.||The main objective of Small Finance Banks is to provide affordable credit to entities like micro and small enterprises, small farmers and industries, and many other unorganised organisations.|
|Scope||Payments Banks offer limited banking services such as deposit accounts, remittances, and debit card issuance. These banks cannot lend money.||Small Finance Banks offer a wider range of financial services, including lending to micro-enterprises and to low-income households.|
|Time Deposits||Payment banks have lower deposit limits and are not permitted to accept time deposits.||Customers can deposit amounts at higher limits and can also get FD and RD facilities.|
|Capital adequacy ratio||Payments banks are permitted to maintain a lower capital adequacy ratio.||The capital adequacy ratio of Small Finance Banks is higher as compared to payments banks.|
Small finance banks are part of the last-mile efforts in ensuring that banking services reach even the remotest parts of the country. These banks, therefore, are a crucial part of the financial inclusion program of the nation and the RBI policy. These banks also provide a good option for MSMEs to get timely credit facilities to meet their credit needs.
as per RBI guidelines, a minimum of 50% of the SFBs loan portfolio should be loans and advances of up to Rs. 25,00,000
The minimum paid-up capital of SFBs at the time of commencement should be Rs. 100 crores at least. However, it should be increased to Rs. 200 crores within 5 years from the date of commencement of business.
RBI is the final deciding authority to provide in-principle approval to the SFBs
The minimum capital adequacy ratio for SFBs in India is 15%