What are SFPs? 

That is, small finance banks are banks that offer basic banking services.

What are Basic Banking Services? 

It accepts deposits and provides information regarding the same. 

Small finance banks aim at a certain target group in order to provide basic banking services at very reasonable rates, so this is the purpose of SFP, and by doing so, it tries to increase financial inclusion in the country. That means more people or more institutions are brought into the formal financial setup in a country, so this is the purpose of SFB or small finance banks. So small finance banks undertake basic banking services, including accepting deposits also ending to underprivileged and underserved sections, so that is why it is called small finance banks. 

Underprivileged or underserved sections mean those entities small business enterprises and marginal farmers, also MSME, the micro small and medium entrepreneurs, the unorganized sector. These are the unorganized sectors because they have lesser access to the formal financial institution compared to larger bodies or larger industries, so that is why they are called underserved.

The payment banks are not allowed to lend, so we have seen that the small finance banks can undertake all the basic banking licensing, including lending and accepting deposits, but payment banks, on the other hand, are not allowed to lend according to the present rules, and also when we talk about the deposits that can be accepted by the payment banks it is capped at 1 lakh rupees per customer, so payment banks have more restrictions in terms of accepting deposits and also lending compared to the small finance banks. They are not at all allowed to lend, whereas the deposit acceptance is restricted to a maximum of 1 lakh rupees, so these are the guidelines given by RBA. 

What is meant by an on tap facility? 

On tap, facility means that the RBI, that is, the Reserve Bank of India, is the regulator of the financial system in the country, licensing banks by RBI all throughout the year; otherwise, what happens is that there will be a particular season or particular period when RBI accepts the proposals or the applications for providing licenses and those bank licenses are also granted at a particular period of time every year or in a certain number of years. But on top Licensing means at any point in time, they will accept an application to grant bank licensing, and at any point in time, RBI can even provide the license; this is called an on tap facility.

Key guidelines are given by RBI: 

1. Regarding the payment bands, payment banks can apply for a conversion to a small finance bank. We have seen there are certain restrictions in the payment banks like the acceptance of deposits is capped at 1 lakh rupees, and there is no provision for lending, so if a payment bank wants to convert itself into a small finance bank, it is possible, and RBI has given its guidelines: first, they can convert into small finance banks after 5 years of operation, i.e. minimum 5 years-they have to complete as a payment month. 
2. Secondly, they have to meet the eligibility criteria, but what are the eligibility criteria? The eligibility criteria are that the payment bank functions as a non-operating financial holding company. In that case, they can convert themselves into a small finance bank, and the promoter of the payments ban is eligible to set up a small finance bank. For a small finance bank earlier, the capital requirement was capped at a hundred crore rupees. RBI has raised the minimum paid-up capital requirement for SFB to a double increase.

Conclusion

Small Finance Banks will occupy the space that is now occupied by some bigger bands. The small finance banks will become capable of occupying the space of the bigger banks, and this will ensure that the marginal section of the underprivileged is getting more access to financial services. Also, what about the success of these SFPs?  It will largely depend upon the quality of the asset. For a bank, the asset is the loans given by the bank, the quality of the asset will be the prime determinant of the success rate of this small finance bank, and second factor would be the test that they gain from the public, and the third one would be the standards of governance and the regulations so what happened with public sector banks.