What is a small finance bank?

The concept of small finance banks came into existence only recently. The first small finance bank (SFB) of India, Capital Small Finance Bank, started operating in 2016. An SFB is meant to increase financial inclusion in the country. Therefore, at least 25% of the branches of any small finance bank should be located in rural areas where banking services are absent or not prevalent. 75% of the loans given by a small finance bank should be to priority sectors identified by RBI. Priority sectors identified by RBI for the purpose of lending are small, medium & micro enterprises, agriculture etc. At least 50% of the loans given by a small finance bank should be of a value of less than Rs 25 lakhs.

Due to the fact that SFBs mainly deal in smaller size loans, the minimum capital requirement for getting a license for a small finance bank is Rs 300 crore, currently. For getting the license of a universal commercial bank, the minimum capital requirement is Rs 1000 crore. So a small finance bank can be started with a lesser amount of capital.

Other services provided by a small finance bank are same as that of a universal commercial bank. They take deposits from the general public. They provide loans to the public. They give personal loans, business loans, gold loans etc. They provide remittance related services. Both domestic remittances and international remittances play an important role in the economies of rural and semi-urban areas of India. As aforementioned, a large percentage of branches of SFBs are located in rural and semi-urban parts of the country.

Penetration of banking services is still very low in rural areas of India. Government schemes such as Jan Dhan Yojna have increased financial inclusion in terms of having a bank account. But lack of access to credit from banks is still prevalent in rural India. Therefore, people living in these parts still have to rely on non-formal channels such as local money lenders, for getting loans. They have to pay higher interest rates when they borrow from local money lenders. Small Finance Banks have a very important role to play in bridging this gap in access to formal credit in rural India.

The idea of small finance bank has turned out to be a success till now. This is also reflected from the high valuations at which some of the small finance banks have got listed in Indian stock markets, in recent times. These include names such as AU Small Finance Bank, Equitas Small Finance Bank, Utkarsh Small Finance Bank etc.