Small Finance Banks: Empowering the Unbanked and Unbanked

Small Finance Banks have been established with the objective of achieving financial inclusion, particularly for segments not served adequately by other banks. This includes catering to small business units, small and marginal farmers, micro and small industries, and entities in the unorganized sector. The primary purpose of these banks is to create an institutional framework that encourages savings in rural and semi-urban areas while facilitating credit for sustainable economic activities within the local communities.

Small Finance Banks

Paving the Way for Financial Inclusion In July 2014, the Reserve Bank of India (RBI) released draft guidelines for small finance banks, initiating a public feedback process. Following the receipt of comments and submissions, the final guidelines were issued in November 2014, with the stipulation that interested entities should submit their applications by January 16, 2015.

Subsequently, in February 2015, the RBI disclosed a list of 72 entities that had applied for a small finance bank license. After thorough scrutiny by an External Advisory Committee led by Mrs. Usha Thorat, the RBI granted 10 provisional licenses to entities, with the condition that they convert themselves into Small Finance Bank. within one year. Eight of these entities were existing microfinance NBFCs, highlighting a focus on financial inclusion. The notable entities include Ujjivan Small Finance Bank, Jana Small Finance Bank, Equitas Small Finance Bank, AU Small Finance Bank, Capital Small Finance Bank, Fincare Small Finance Bank, ESAF Small Finance Bank, North East Small Finance Bank, Suryoday Small Finance Bank, and Utkarsh Small Finance Bank.

Key Regulatory Features of Small Finance Banks

1. These banks can be promoted by individuals, corporate houses, trusts, or societies.
2. Promoters should possess 10 years of experience in banking and finance, with a capital stake of 40% of equity, which must be reduced to 26% over 12 years.
3. Joint ventures are not allowed, and foreign shareholding is subject to Foreign Direct Investment rules in private banks in India.
4. Existing Non-Banking Financial Companies (NBFCs), Micro Finance Institutions (MFI), and Local Area Banks (LAB) may convert themselves into small finance bank. through applications to the RBI.
5. Small Finance Bank. need to be registered as Public Limited Companies under relevant statutes, including The Companies Act, 2013, Reserve Bank of India Act, 1934, and Banking Regulation Act, 1949.
6. These banks are not restricted to any specific region. Seventy-five percent of their Net Credit should be allocated to Priority Sector, and 50% of their loans should be in the range of up to Rs. 25 lakhs.
7. Small Finance Bank. should have a capital of at least Rs. 100 crore.
8. Listing becomes mandatory within three years at a net worth of Rs. 500 crore, and those with a net worth below Rs. 500 crore may voluntarily list their shares.
9. The scope of business includes basic banking activities, focusing on acceptance of deposits and lending to unserved and underserved sections. With prior approval from the RBI, they can undertake riskless activities such as distribution of mutual fund units, insurance products, pension products, etc.
10. Small Finance Bank. can also become Category II Authorized Dealers in foreign exchange business for their clients’ requirements but cannot set up subsidiaries for non-banking financial services activities.

These regulatory features emphasize the inclusive role of Small Finance Bank. in catering to various segments of the economy, promoting financial stability and accessibility.

Small Finance Banks FAQ