SMALL FINANCE BANKS AND

Small Finance Banks (SFBs) are a type of niche banking institution introduced by the Reserve Bank of India (RBI) to further financial inclusion by providing essential banking services to underserved and unserved sections of society, including small businesses, small and marginal farmers, micro and small industries, and other unorganized sector entities.

Key Features of Small Finance Banks

1. Objective:
   • The primary objective of SFBs is to further financial inclusion by providing credit to small businesses, micro enterprises, small and marginal farmers, and other low-income groups.
2. Scope of Operations:
   • SFBs can provide basic banking services, including accepting deposits and lending. They are allowed to offer savings accounts, current accounts, fixed deposits, recurring deposits, and various loan products.
3. Regulatory Framework:
   • SFBs are regulated by the RBI under the Banking Regulation Act, 1949, and are subject to prudential norms and regulations applicable to commercial banks.
4. Capital Requirements:
   • The minimum paid-up capital requirement for SFBs is ₹200 crore.
5. Promoter’s Contribution:
   • The promoter’s minimum initial contribution to the paid-up equity capital of an SFB shall be at least 40% for the first five years from the commencement of business. The promoter’s stake should be brought down to 30% within ten years and to 26% within 12 years from the date of commencement of business.
6. Loan Size Restrictions:
   • At least 50% of the loan portfolio of SFBs should constitute loans and advances of up to ₹25 lakh.
7. Priority Sector Lending:
   • SFBs are required to extend 75% of their adjusted net bank credit (ANBC) to the sectors eligible for priority sector lending (PSL) as stipulated by the RBI.

Examples of Small Finance Banks

1. Ujjivan Small Finance Bank:
   • Background: Originated from Ujjivan Financial Services, a microfinance institution.
   • Focus: Provides financial services to economically active poor who are not adequately served by the formal banking system. Offers a wide range of banking products including savings accounts, fixed deposits, and loans for micro-enterprises, housing, education, and personal use.
   • Branch Network: Extensive network of branches, particularly in underserved and rural areas.
2. Equitas Small Finance Bank:
   • Background: Evolved from Equitas Micro Finance, which was engaged in providing microloans to small businesses.
   • Focus: Offers savings and current accounts, fixed and recurring deposits, and various loan products including microloans, vehicle loans, and affordable housing loans.
   • Digital Services: Known for its digital banking initiatives and user-friendly mobile banking app.
3. AU Small Finance Bank:
   • Background: Started as AU Financiers (India) Limited, a non-banking finance company (NBFC) focused on vehicle finance.
   • Focus: Provides a comprehensive range of banking products including savings accounts, term deposits, and a variety of loans such as vehicle loans, MSME loans, and home loans.
   • Market Presence: Strong presence in rural and semi-urban areas, catering to the needs of small businesses and individual borrowers.
4. Janalakshmi Small Finance Bank (Now Jana Small Finance Bank):
   • Background: Transitioned from Janalakshmi Financial Services, a prominent microfinance institution.
   • Focus: Offers savings and current accounts, fixed deposits, and diverse loan products targeting small and micro enterprises, as well as individuals in the low-income segment.
   • Community Engagement: Active in promoting financial literacy and community development programs.
5. Fincare Small Finance Bank:
   • Background: Emerged from two NBFC microfinance institutions, Disha Microfin and Future Financial Services.
   • Focus: Provides savings and current accounts, fixed and recurring deposits, and loans tailored for micro and small enterprises, agriculture, and individual needs.
   • Digital Innovation: Emphasizes digital banking solutions to enhance customer experience and operational efficiency.

Key Differences Between Small Finance Banks and Other Types of Banks

Feature	Small Finance Banks	Public Sector Banks	Private Sector Banks	Regional Rural Banks
Objective	Financial inclusion, providing credit to underserved sections	Broad range of services, focus on public welfare	Profit-oriented, focus on technology and customer service	Rural and agricultural development
Capital Requirement	Minimum ₹200 crore	Varies (higher for large banks)	Varies (higher for large banks)	Jointly owned by government and sponsor bank
Loan Size Focus	50% of loan portfolio to loans up to ₹25 lakh	Varies, including large corporate loans	Varies, including large corporate loans	Focus on small and agricultural loans
Priority Sector Lending	75% of ANBC	40% of ANBC	40% of ANBC	75% of total advances
Branch Network	Focus on rural and underserved areas	Extensive, both urban and rural	Extensive, both urban and rural	Regional, focused on specific areas
Ownership	Private, with promoter contribution	Government majority ownership	Private majority ownership	Government and sponsor bank ownership

Summary

Small Finance Banks (SFBs) in India are an integral part of the financial inclusion strategy, aimed at providing essential banking services to underserved and low-income segments of the population. They focus on small-scale lending, cater to the needs of micro and small enterprises, and operate under a regulatory framework set by the RBI to ensure stability and growth. Examples like Ujjivan, Equitas, and AU Small Finance Bank highlight the diverse approaches and innovations brought by these banks to enhance financial accessibility and inclusion in India.