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What Is Meant By A Small Finance Bank?
Small Finance Banks is the type of niche bank created by the Reserve Bank of India (RBI) in the country. In November 2014, the RBI first issued the guidelines of the Small Finance Banks. These banks have the license to provide basic banking services of accepting deposits from the public and lending money to the public. The main aim of establishing such banks is to provide financial assistance to those sections of the economy that are oftentimes ignored and thus, not served by the other banks. These sections might include small business units, micro, and small companies, small and marginal farmers, unorganized sector units, etc. the SFBs are the financial institutions that provide essential financial services to the non-served and unbanked regions of the country.
What Are The Objectives Of Small Finance Banks?
The main and foremost objective of the SFBs is to strengthen financial inclusion and promote oftentimes ignored sections of the country like micro and small companies, small business facilities, small and marginal farmers, etc.
To provide a financial institutional mechanism so that savings among the rural and semi-urban regions of the country can be promoted.
Mentioning The Key Features Of Small Finance Banks
Small Finance Banks are registered under the Companies Act 2013 as public limited companies.
The license to these banks is issued under section 22 of the Banking Regulation Act 1949.
When it comes to the governance of the SFBs, these are regulated by the provisions of the Banking Regulation Act 1949 and the Reserve Bank of India Act 1934.
The main motive of RBI to establish such banks is to help the financially weaker sections of the economy in both rural and semi-urban regions.
The citizens of the country having experience of at least 10 years in the banking and finance, companies, and societies are eligible to act as the promoter and thus, set up the SFB.
Non-Banking Financial Companies, Local area Banks, and Microfinance institutions are allowed to transform their operations into those of SFBs.
In case a Small Finance Bank wants to expand its branch then it will require prior approval for an initial 3 years.
It is essential for the Small Finance Banks to follow the robust framework for risk management and for the same purpose these financial institutions are subject to follow all norms and guidelines as specified by RBI.
Two types of loans are provided by the Small Finance Banks to the public- individual loans and group loans. The group loans can only be provided on joint liability.
When it comes to the maximum loan size and investment limit exposure to the group borrowers, it is restricted to 15% of capital funds.
It is mandatory to constitute at least 50% of the loan portfolio in case the bank is advancing loans of less than or equal to 25 lakhs.
The public can deposit their money in the Small finance Banks in current accounts, fixed deposit accounts, saving accounts, money instruments, etc.
6-7% rate of interest is charged by SFBs on saving accounts and 9% interest on fixed accounts.
Mentioning The RBI Guidelines For The Small Finance Banks
The minimum paid-up capital of the Small Finance Banks must be Rs 100 Crore.
The financial institution established as a small finance bank must carry ‘Small Finance Bank’ in its name.
To carry out financial operations including distributing mutual funds, pension, insurance plans, etc, the Small Finance Banks must obtain the approval of RBI.
25% of the branches of any Small Finance Bank must be located in the unbanked region of the country.
It is mandatory for the Small Finance Banks to maintain CRR and SLR as specified by the RBI.
Small Finance Banks are required to extend at least 75% of their Adjusted Net bank credit to the sections classified by the RBI as priority sector lending.
Small Finance Banks can transit to the universal banks after they have a minimum paid-up capital or net worth requirements as specified for the universal banks.
Small Finance Banks are not allowed by the RBI to act as business Correspondent to another bank in the country but they are allowed to have their own Business Correspondent network.
Conclusion
It is the Small Finance Banks that have come as a blessing in disguise for those sections of the country that are oftentimes ignored by the commercial financial institutions. It is the Small Finance Bank that provides financial assistance to small and medium enterprises, small and marginal farmers, micro and small business units, etc. Aspirants planning to appear for upcoming NDA exams must have an understanding of Small Finance Banks. This article will guide you through Small Finance Banks in the country.
