SMALL FINANCE BANKS

April 8, 2019

Data from the Reserve Bank of India (RBI) show that the small finance banks have seen a remarkable growth in credit disbursement as well as deposits, although on a low base.

About:

What are they? Small Finance Bank (SFB) are a niche type of banks in India who cater to mainly customers not being serviced by the big commercial banks such as small business units, small farmers, MSMEs and various other unorganised sectors.
Timeline: In 2014, RBI issued guidelines for setting up SFBs in the country. In 2015, RBI announced that it had given provisional licenses to ten entities who would have to convert into small finance banks within one year.
Status according to RBI: SFBs have the status of a scheduled bank under Section 42(6)(a) of the RBI Act, 1934.

Comparison with commercial banks:

Similarities:
- Like commercial banks, they provide both the saving and lending facility.
- Small finance banks will be subject to all prudential norms and regulations of the RBI as applicable to existing commercial banks. This will include maintaining CRR and SLR.
Differences: However, small banks have to follow stricter regulations as proposed by RBI.
- Every small finance bank must have the words -- small finance bank -- in its name.
- They cannot set up subsidiaries to undertake non-banking financial service activities.
- It must have 25% of its branches set up in unbanked areas.
- 75% of its Adjusted Net Bank Credit (ANBC) should be advanced to the priority sector as categorized by RBI.
- Small banks can undertake financial services like distribution of mutual fund units, insurance products, pension products, and so on, but not without prior approval from the RBI.