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Small finance banks are financial institutions that cater to the financial needs of underserved sections in India, intending to promote economic inclusion. These institutions are being set up as public listed companies within the private sector and are registered under the Companies Act 2013. However, one must note that these are governed by the Reserve Bank of India Act 1934, Section 22 of the Banking Regulation Act 1949, and other applicable statutes.
Small finance banks belong to a specific category of niche banks in India. They are specifically set up to provide financial assistance and banking services to underserved sections such as marginal farmers, micro and small enterprises, and other small businesses.
Features Of Small Finance Banks
- Any registered small finance bank must set up at least 25% of its branches in unbanked rural regions.
- The minimum capital requirement for setting up a small finance bank is INR 100 crore.
- The activities of small finance banks are ruled and governed as per the norms set up by the Reserve Bank of India. These include maintaining CRR (Cash reserve ratio) and SLR (Statutory liquidity ratio).
- Small finance banks are allowed to deal in foreign exchange business depending on the requirements and needs of their customers.
- These institutions can also participate in activities such as dealing in mutual funds, buying and selling insurance products, and pension products. However, they must obtain a licence along with the relevant approval from the Reserve Bank of India to perform these.
Services For Underserved Sections
One of the primary functions of small finance banks is to facilitate financial inclusion by providing financial aid to underserved sections of society. These underserved segments comprise small business units, micro and small industries, and other entities existing in the unorganised sector.
Services For Marginal Farmers
As per the rules set up by the Reserve Bank of India, marginal farmers are included under the priority sector to be catered by small finance banks. It comes under farm credit, where a small finance bank can lend loans to small and marginal farmers to purchase land for agricultural activities. However, it must be noted that the Reserve Bank of India has set up different criteria for the small and marginal farmers in a sub-target section.
Services For Small Businesses
Small finance banks can also extend collateral inclusive or collateral-free loans to Micro and Small Enterprises (MSME) and small businesses. It is mainly done to promote the idea of financial inclusion and provide financial assistance to micro-enterprises and other small business organisations. Small businesses usually struggle with finances to carry out their operational activities, which makes it difficult for them to sustain themselves in the market. Thus, small finance banks help these business units to carry out their operations and contribute to the country’s growth.
Difference Between A Commercial Bank And A Small Finance Bank
Basis of difference | Commercial bank | Small finance bank |
Target customers | Caters to all sections of the society, no restriction to | Provides its services only to underserved sections such as marginal farmers, MSMEs, and other small businesses |
Capital requirements | Requires INR 500 crore as its initial capital | Need a minimum capital of INR 100 crore |
Banking services | Banking services include current and savings accounts, commercial loans and mortgages, investment products such as CDs, and safe deposit boxes. | Banking services include deposits, lending to underserved sections including small businesses, small/marginal farmers, micro and small enterprises (MSMEs) and other entities belonging to the unorganised sector. |
Branches | No mandatory branch set up requirements, can open in any part of the country | For the first 3 years of operations, 25% of the bank’s branches should be set up in rural areas. |
Scale of operation | Operate on a large scale and can sanction larger loan amounts to their clients depending on the eligibility criteria | Set up on a small scale, which allows them to deal only with small amounts of borrowing |
Small Finance Banks In India
As per the latest available information, there are 11 operational and registered small finance banks in India. These include the following:
- 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
- Shivalik Small Finance Bank Limited
Conclusion
Small finance banks are an essential part of the Indian economy that helps it achieve financial inclusion. It is a one-of-its-kind step by the Government of India to provide solutions and assistance to priority sectors of the country to help them carry out their operations without any major financial obstacles. It is also important to note that the initial idea of a small finance bank was recommended by the Nachiket Mor Committee led by Nachiket Mor. Major target sections of small finance banks include micro and small industries, marginal farmers, and other entities belonging to the unorganised sector. Thus, these cater only to the financial needs of a small segment of the economy.
