What are Small Finance Banks?
Small Finance Banks (SFBs) are a special category of banks in India created by the Reserve Bank of India (RBI) with the goal of advancing financial inclusion. Unlike traditional commercial banks, SFBs focus on providing basic banking services such as accepting deposits and offering loans to segments of the population that are often underserved by larger banks. This includes small farmers, small business owners, micro‐entrepreneurs, and low‐income households.
The primary idea behind SFBs is to bring formal financial services to areas where access to credit and savings instruments has historically been limited. By operating in both rural and urban locales, these banks help people manage their money safely, access affordable credit, and gradually improve their economic well-being.
Small Finance Banks in India
The concept of Small Finance Banks emerged in 2015 when the RBI introduced guidelines to license institutions that could further the cause of financial inclusion. Prior to this, microfinance institutions (MFIs), local cooperative banks, and non-banking financial companies (NBFCs) served similar segments but under tighter regulatory constraints. With the launch of SFBs, the RBI provided a clearer regulatory framework that allowed these entities to function more like regular banks while still focusing on priority sectors.
To qualify as an SFB, an applicant must have a minimum paid-up equity of ₹200 crore and demonstrate the ability to serve unbanked and underserved sections. Once licensed, SFBs must ensure that at least 75% of their net loans go to borrowers in the priority sector, which includes agriculture, micro-enterprises, and economically weaker sections. Since 2016, several institutions received licenses, and today there are over a dozen SFBs operating nationwide. They collectively cover thousands of branches, with many specifically mandated to set up at least 25% of their branches in unbanked rural centers.
Benefits of Small Finance Banks
Enhanced Financial Inclusion:
By design, SFBs focus on bringing banking services to rural and semi-urban areas. They often set up branches in locations where bigger banks do not find it profitable to operate. This increases the reach of formal banking, reducing dependence on informal moneylenders who charge exorbitant interest rates.
Tailored Credit Products:
Since SFBs understand the needs of small borrowers like farmers, artisans, and micro-entrepreneurs they design loan products that match irregular income cycles and seasonal requirements. For example, an SFB may offer crop-specific loans that align repayment schedules with harvest times.
Competitive Deposit Rates:
To attract low-balance savers and build a reliable deposit base, SFBs often offer attractive interest rates on various deposit schemes (savings accounts, fixed deposits, recurring deposits). This encourages saving habits among low-income households, helping them build financial security over time.
Simplified Account Opening:
Many SFBs streamline their account opening processes, allowing individuals with minimal documentation to open savings accounts. They leverage Aadhaar-based e-KYC (know-your-customer) norms, making it easier for rural and semi-urban customers to start using banking services without the hassle of extensive paperwork.
Digital Banking Services:
While SFBs maintain a strong focus on rural outreach, they also invest in digital channels mobile banking, internet banking, and point-of-sale systems. This blend of physical and digital presence ensures that customers can access their accounts, make transactions, and avail credit products with greater convenience.
Priority Sector Lending:
By directing at least three-fourths of their loan portfolio to priority sectors, SFBs play a vital role in channeling credit to areas like agriculture, micro-small and medium enterprises (MSMEs), and weaker sections of society. This helps drive economic growth at the grassroots level and supports livelihood activities across various regions.
Features of Small Finance Banks
Regulatory Framework and Licensing:
Small Finance Banks are licensed under Section 22(1) of the Banking Regulation Act, 1949. To receive an SFB license, promoters must meet capital adequacy requirements (minimum paid-up capital of ₹200 crore) and clarify their track record in serving the target segments. The RBI’s guidelines ensure that these banks operate with proper governance and risk management practices.
Priority Sector Focus:
At least 75% of the Adjusted Net Bank Credit (ANBC) must go towards priority sectors. This is a stricter requirement compared to many commercial banks, which helps ensure that SFBs remain committed to lending for agriculture, micro-businesses, and financial inclusion initiatives.
Branching and Geographic Coverage:
A unique requirement is that SFBs open a minimum of 25% of their branches in unbanked rural areas. This helps bring formal banking to locations that may not have bank branches otherwise. There is no upper limit on branch expansion; once the initial requirement is met, SFBs can open branches anywhere in India, subject to RBI approval.
Permissible Activities:
- Accepting Deposits: SFBs can accept demand deposits (savings and current accounts) and time deposits (fixed and recurring deposits).
- Lending Services: They provide loans and advances to individuals and small businesses, especially in agriculture and micro-enterprises.
- Other Services: SFBs can offer third-party products like insurance and mutual funds, forex services (subject to RBI permission), remittance services, and payment/settlement systems.
Prudential Norms and Governance:
SFBs must adhere to RBI’s prudential norms capital adequacy ratio must not fall below 15% of risk-weighted assets. They also follow guidelines on asset classification and provisioning, ensuring financial stability. Good corporate governance practices are mandated, with Boards that include professionals experienced in finance and social development.
Digital and Financial Literacy Initiatives:
Recognizing that many of their customers are new to banking, SFBs invest in digital literacy campaigns. They conduct awareness programs on how to use mobile banking, ATMs, and safety measures against fraud. This empowers customers to adopt modern banking practices without fear.
Loan Products and Pricing:
SFBs design loans for small farmers, tenant farmers, micro-entrepreneurs, and low-income households. Interest rates are often competitive and aligned with priority sector lending rates. Some SFBs offer collateral-free micro-loans up to ₹50,000 or more under government-supported schemes.
Examples of Small Finance Banks in India
AU Small Finance Bank:
Originally a vehicle finance NBFC, AU Small Finance Bank began operations as an SFB in 2017. Headquartered in Jaipur, it offers a variety of products like small business loans, home loans (via collaborations), gold loans, and tailored savings schemes. Today, it has over 900 branches, mainly in North and West India, helping low-income customers access credit and banking services.
Ujjivan Small Finance Bank:
Promoted by Ujjivan Financial Services (an MFI), Ujjivan SFB started in 2017 with the mission of bringing financial services to the unserved. Based in Bengaluru, it offers micro-loans, individual and business banking, savings accounts, and insurance. It emphasizes digital banking and has over 600 branches across India, including remote rural areas.
Equitas Small Finance Bank:
Established in 2016 and based in Chennai, Equitas SFB grew out of Equitas Micro Finance. It provides micro-credit, micro-savings, and small business loans. Over time, Equitas has diversified into retail banking with savings accounts, fixed deposits, and home loans. It has more than 500 branches, primarily in South and East India.
Jana Small Finance Bank:
Launched in 2018 in Bengaluru, Jana SFB originated from Jana Financial (an MFI). It focuses on micro-loans, MSME loans, and digital banking products like mobile wallets and remittances. Jana SFB serves over 200 locations, catering to underserved customers in rural and semi-urban regions.
Fincare Small Finance Bank:
Fincare NGO, which operated microfinance services, converted to an SFB in 2017. Headquartered in Bengaluru, it extends micro-credit, agricultural loans, and small business financing. The bank emphasizes financial literacy and digital solutions, maintaining around 200+ branches to cover South and West India.
Suryoday Small Finance Bank:
Based in Mumbai and converted to an SFB in 2017, Suryoday focuses on microfinance and MSME lending. It offers savings accounts, fixed deposits, and vehicle loans. Operating primarily in Maharashtra and other Western states, Suryoday has more than 200 branches, many of which are in rural areas.
Utkarsh Small Finance Bank:
Utkarsh India Ltd., an MFI, received its SFB license in 2017. Headquartered in Varanasi, Utkarsh SFB serves borrowers in Eastern and Central India. It provides micro-loans, SME loans, and housing micro-finance. Utkarsh operates over 500 branches, with a network that reaches remote villages in Uttar Pradesh, Bihar, and neighboring states.
North East Small Finance Bank (NESFB):
Promoted by North East Development Finance Corporation Limited (NEDFi), this SFB started operations in 2018 to serve India’s Northeast region. Headquartered in Guwahati, NESFB offers agro-loans, SME financing, and savings accounts, focusing on states like Assam, Meghalaya, and Manipur. It has over 50 branches across the region.
Shivalik Small Finance Bank:
Originally Shivalik Mercantile Co-operative Bank, it converted to an SFB in 2016. Based in Dehradun, it caters to customers in Uttarakhand and nearby states. It provides micro-credit, SME loans, and retail banking services. Shivalik SFB has around 90 branches, many in hilly and underserved areas.
ESAF Small Finance Bank:
ESAF, a Kerala-based NGO working in microfinance and social development, became an SFB in 2017. Headquartered in Thrissur, ESAF SFB focuses on micro-loans for women, small farmers, and entrepreneurs. It also offers insurance and pension products. With over 400 branches across South India, it champions financial inclusion among lower-income groups.
Capital Small Finance Bank:
Originating from Capital Local Area Bank (Udaipur), this bank obtained its SFB license in 2016. Based in Udaipur, Rajasthan, it serves customers in Rajasthan, Gujarat, and Madhya Pradesh. It provides micro-credit, SME banking, and rural banking services. Capital SFB has over 150 branches, many set up in remote villages.
Other Emerging SFBs:
A few other institutions have also started operating as SFBs, such as Unity Small Finance Bank and Chennai Small Finance Bank (in the process of starting operations). As RBI continues to encourage financial inclusion, more SFBs may emerge in the coming years, further broadening the spectrum of banking services available to underserved populations.