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About The Small Finance Banks


The Reserve Bank of India (RBI) has recently announced its decision to reject three applications for setting up Small Finance Banks as these applications were found not suitable for granting of in-principle approval to set up SFBs.

RBI received approximately a dozen applications under the guidelines for ‘on-tap’ Licensing of Universal Banks and SFBs.


GS III: Indian Economy

Dimensions of the Article:

  1. About Small Finance Banks (SFBs)
  2. RBI Guidelines on SFBs in India

About Small Finance Banks (SFBs):

  • SFBs are specialized banks licensed by the Reserve Bank of India (RBI) to cater to the financial needs of low-income individuals and underserved communities.
  • They provide financial services and products such as microfinance, micro-enterprise services, and basic banking services.
  • The main objective of SFBs is to promote financial inclusion by offering access to financial products to segments of the population who are excluded from the traditional banking system.
  • SFBs are registered as public limited companies under the Companies Act, 2013.
  • The RBI introduced guidelines for SFBs in 2014 to regulate their operations.

Small Finance Banks are governed by the provisions of the:

  • Banking Regulation Act, 1949;
  • Reserve Bank of India Act, 1934;
  • Foreign Exchange Management Act, 1999;
  • Payment and Settlement Systems Act, 2007;
  • Credit Information Companies (Regulation) Act, 2005;
  • Deposit Insurance and Credit Guarantee Corporation Act, 1961;
  • Other relevant Statutes and the Directives, Prudential Regulations and other Guidelines/Instructions issued by Reserve Bank of India (RBI) and other regulators from time to time.

RBI Guidelines on SFBs in India:

  • SFBs are granted scheduled bank status after becoming operational and meeting the requirements under Section 42 of the RBI Act, 1934.
  • The primary focus of SFBs is to provide financial services to the unbanked and underbanked segments of the population.
  • They are required to maintain a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 15%.
  • SFBs must extend at least 75% of their Adjusted Net Bank Credit to Priority Sector Lending.
  • They are required to open a minimum of 25% of their branches in unbanked rural areas.
  • The minimum paid-up voting equity capital for small finance banks is set at Rs. 200 crore.
  • SFBs must maintain at least 50% of their loan portfolio as microfinance and advances of up to Rs. 25,00,000.
  • They need to comply with various prudential norms and regulations regarding income recognition, asset classification, and provisioning.
  • SFBs are encouraged to adopt technology to enhance their operational efficiency and reach the target segments.

Source: The Hindu

December 2023