Small Finance Banks (SFBs) are a relatively recent development in India’s banking industry. These banks address the needs of marginal farmers, microbusinesses, and underserved individuals, aiming to promote financial inclusion. Thus, SFBs differ from typical commercial banks.
SFBs focus on rendering traditional banking services, emphasizing deposit products, small-ticket loans, and digital platforms to target rural and semi-urban communities. Significantly, the Reserve Bank of India (RBI) has licensed these institutions and oversees them, ensuring that they operate in an open and safe environment. As a result, a small finance bank has become a vital tool for social and economic development.
Meaning of Small Finance Bank
A small finance bank is a specialized banking institution. It primarily accepts deposits and provides credit to underserved populations that traditional banks often neglect, offering a focused range of financial services. The Reserve Bank of India granted them a license under the Banking Regulation Act, 1949. This initiative expands financial inclusion by offering banking services to marginal farmers, small business owners, micro-industrialists, and low-income families.
Additionally, these banks leverage lean, high-tech business structures to effectively serve geographically distributed clients while maintaining low expenses. Besides, expanding access to financial services in semi-urban and rural areas is the primary goal of a small finance bank. Small and marginal farmers, small business units, and micro and tiny businesses use basic banking services.
Small finance banks also seek to serve firms operating in the unorganized sector, which are among the underserved client segments. Besides, small finance banks may offer an alternative to the current financial institutions. They maintain a focus on small and marginal farmers, small and medium-sized enterprises, and the informal sector. This promotes financial inclusion by helping a range of underserved people in the hinterland.
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Small Finance Banks in India
The Reserve Bank of India (RBI) created the Small Finance Bank (SFB), a niche bank category, to promote financial inclusion. These banks aim to assist underprivileged groups, including low-income individuals, small business owners, and rural clients, by providing basic financial services. The RBI does not explicitly classify SFBs into different segments, but they can be categorized informally based on their operational model, focal area, and place of origin. Here are some of them.
Microfinance Institution (MFI)-Turned SFB
In underserved communities, these banks started as MFIs providing modest, unsecured loans. They continued their heritage of microlending while branching out into deposits and other services after obtaining an SFB license. Ujjivan and ESAF SFBs are two examples.
NBFC-Converted SFB
These financial institutions began life as non-banking financial companies and are now called SFBs to accept deposits and foster growth. This category is best represented by AU Small Finance Bank, which was formerly an NBFC that provided auto financing.
Local Area Bank (LAB)-Converted SFB
These banks, which have strong local ties, switched from regional banking to SFBs to expand their reach. Before becoming the first SFB in India in 2016, Capital Small Finance Bank was known as Capital Local Area Bank.
Urban Co‑operative Bank (UCB)-Upgraded SFB
Community-serving cooperative banks turned to SFBs to extend their financial services. One such example is Shivalik Small Finance Bank, which changed from a cooperative to an SFB.
How do Small Finance Banks work?
First and foremost, Small Finance Banks primarily operate by providing essential banking services. In addition, these comprise savings and term deposits, microloans, and payment facilities, mainly focused on underserved or unbanked segments. To reach remote consumers, they typically leverage branch networks and technology platforms such as digital onboarding (e.g., Aadhaar-enabled KYC) and mobile banking.
SFBs are required to allocate a substantial part of their lending to the priority sector. This ensures that farmers, micro, small, and medium-sized enterprises (MSMEs), along with underserved communities, have access to finance.
This is akin to the practices of other scheduled banks, showcasing their adherence to compliance obligations. Interestingly, SFBs often emerge from the conversion of NBFCs, microfinance institutions, or local area banks. They utilize their pre-existing rural networks since they receive banking licenses.
Finally, established and well-capitalized SFBs can become regular banks, which allows them to offer a broader range of services, including subsidiaries and corporate loans. Besides, the RBI has set specific criteria for eligibility. These include sustained profitability over five years, a net worth of ₹10 billion, low NPAs, and adherence to shareholder structure norms.
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Are Small Finance Banks under the RBI?
A Small Finance Bank operates under the direct supervision of the Reserve Bank of India. They are created through licenses according to Section 22 of the Banking Regulation Act, 1949. Additionally, they also have to follow the legislation, which includes the RBI Act, the Payment & Settlement Systems Act, and the Deposit Insurance & Credit Guarantee Corporation Act, to name a few.
Also, SFBs must follow the RBI’s prudential rules. Maintain the CRR and SLR, satisfy the standards for lending to priority sectors (75% of adjusted Net Bank Credit), and work within the rules for capital adequacy.
The RBI monitors their growth closely and mandates that at least 25% of its branches operate in rural areas without access to banking services. Besides, the RBI must approve any switch to products like mutual funds, insurance, or pensions. The RBI monitors SFBs, which operate under a strict regulatory framework.
Products and services offered by Small Finance Banks
A small finance bank offers important financial services designed for marginalized groups, including people with low incomes, farmers, and small business owners. Moreover, with its user-friendly digital lending and deposit services, it promotes inclusion by bridging the gap between formal and informal banking.
Savings & Deposit Accounts
SFBs provide easily accessible choices for deposits and savings, such as fixed deposits, recurring deposits, and savings accounts with low minimum amounts. Therefore, these products often offer flexible features and attractive interest rates to promote savings habits in people.
Loan Products
SFBs provide finance via agriculture loans, home loans, MSME loans, personal loans, and microloans. These loans, which will help with agricultural requirements, growth, and income generation of small businesses, often provide flexible terms with minimal paperwork, so that deserving candidates benefit.
Microfinance Services
Microfinance, which provides small loans to individuals and small businesses, is a significant focus area of a small finance bank. They also offer microcredit for agricultural, income-generating, and other productive objectives, using their considerable knowledge of local markets and clients. Small finance banks empower individuals and promote grassroots entrepreneurship by offering funding to those who lack access to traditional banking services.
Digital & Banking Services
With an emphasis on technology, SFBs offer doorstep banking, biometric ATMs, Aadhaar-based account opening, and internet and mobile banking. Besides, they also use digital platforms to efficiently serve remote areas, reduce operational frictions, and improve client access.
Insurance, Investment & Payment Services
With prior RBI clearance, a large number of SFBs distribute mutual fund, pension, and insurance products (life, health, and micro-insurance). Additionally, they integrate financial services into everyday life by facilitating payment services, including remittances, prepaid cards, QR code payments, FASTag, and UPI.
Deposit Products and Savings Schemes
Small finance banks offer a range of deposit products and savings schemes that are tailored to suit the needs of their customers, along with loan facilities. These include recurring deposits, fixed deposits, savings accounts, and individualized savings schemes that ensure regular saving. Apart from this, Small Finance Banks help individuals achieve long-term financial goals and become financially resilient by fostering a savings culture.
Financial Literacy & Priority Sector Lending
They provide financial literacy and awareness initiatives, particularly in rural communities, as part of their commitment to inclusivity. Additionally, SFBs follow RBI-mandated priority sector lending guidelines, directing credit toward areas such as microbusinesses, housing, education, agriculture, and economically weaker sections of society.
List of Small Finance Banks
Some of the leading small finance banks in India facilitate financial inclusion by enabling everyone to borrow, save, and use banking services. They support individuals requiring small loans to meet their financial needs or grow their business, such as small traders and entrepreneurs. Here are some of India’s best small finance banks, known for their products and approach towards customer service:
AU Small Finance Bank
One of India’s most successful and biggest SFBs is AU Small Finance Bank, based in Jaipur. It began as a car financing NBFC. It now offers a wide range of retail banking products, including savings, loans, and digital services, reaching both rural and urban consumers successfully.
Ujjivan Small Finance Bank
In 2017, Ujjivan Small Finance Bank transitioned into an SFB after starting as a microfinance institution. Headquartered in Bengaluru, the organization offers microloans, fixed deposits, and savings accounts to low-income individuals and small businesses. Its strong presence in urban and semi-urban regions stands out.
Equitas Small Finance Bank
Originally an NBFC, Chennai-based Equitas is now a fully functional SFB. It provides investment services, insurance, savings accounts, and personal loans. The bank works with people from all income levels, but focuses on small enterprises, self-employed people, and women entrepreneurs in markets that often receive insufficient attention.
Utkarsh Small Finance Bank Limited
Founded in 2017, Utkarsh Small Finance Bank has its headquarters in Varanasi. It emphasizes financial inclusion, particularly in India’s north and east. Targeting underprivileged and rural communities, the bank provides a range of services such as microloans, savings accounts, fixed deposits, and insurance products.
Jana Small Finance Bank
Bengaluru-based Jana Small Finance Bank formally launched its SFB operations in 2018 after evolving from a microfinance foundation. It has a strong presence in urban and rural areas, prioritizing financial access for economically disadvantaged groups by providing digital banking, loans, and savings options.
Fincare Small Finance Bank
With its main office in Bengaluru, Fincare Small Finance Bank prioritizes technology and inclusive banking. Before the 2024 merger with AU SFB, it focused on digital savings and microloans. The bank provided doorstep financial services, mobile banking, and paperless onboarding mostly to rural and semi-urban regions.
ESAF Small Finance Bank Limited
A microfinance institution based in Kerala, ESAF SFB, evolved into a full-fledged small finance bank. To empower low-income groups, it provides retail banking, microloans, and social impact products. ESAF prioritizes community engagement and financially empowers women as a sustainable banking organization.
Suryoday Small Finance Bank Ltd
Suryoday SFB, based in Mumbai, provides retail banking services, two-wheeler loans, and microfinance. Technology-driven microbanking has established a niche. The bank is steadily enhancing its asset quality. It diversifies its loan book while maintaining its mission to reach unbanked populations through doorstep banking and digital tools.
Conclusion
In India, small finance banks are critical to narrowing the financial inclusion gap. They provide a limited range of banking services, with a focus on deposits, modest loans, and digital access. However, they continue to significantly impact the delivery of agile and innovative services to underserved and neglected communities.
These institutions, which are regulated and monitored by the RBI, have the flexibility to grow while being firmly entrenched in regulatory stability. Besides, with inclusive development at its core, some SFBs are on track to become regular banks as they grow, potentially transforming the banking sector.
FAQs
1. What do you mean by Small Finance Bank?
A Small Finance Bank is a licensed entity under the RBI. They provide some primary financial services, which are savings, term deposits, and small loans to underserved communities such as small farmers, micro-businesses, and low-income individuals. Besides, it promotes financial inclusion via efficient, community-based operations.
2. What is the difference between a Small Finance Bank and a normal bank?
A Small Finance Bank, regulated by the RBI, targets underserved populations with small-ticket banking, offers restricted services, and meets priority lending standards. A traditional commercial bank provides a full array of services, including large corporate lending, investment banking, and broader retail offerings.
3. Which is the No. 1 Small Finance Bank?
AU Small Finance Bank is regarded as the largest SFB in India based on its asset base. Its customer reach has significantly expanded, especially following the merger with Fincare Small Finance Bank in April 2024.
4. Which Small Finance Bank is best for FD?
Several SFBs offer competitive fixed deposit interest rates, higher than those offered by traditional banks. The best depends on current rates and tenure. Check official bank websites or financial platforms for recent, specific FD rate comparisons.
