Important Topic: Small Finance Banks (SFBs)

Important Topics for Competitive Exams


Important Topic

Small Finance Banks (SFBs)

  • They are niche banks that focus and serve the needs of a certain demographic segment of the population.
  • The objectives of setting up of small finance banks will be to further financial inclusion by (1) the provision of savings vehicles (2) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, through high technology-low cost operations.
  • SFBs was recommended by the Nachiket Mor committee on financial inclusion.

Scope of activities of SFBs

  • The small finance banks shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
  • There will not be any restriction in the area of operations of small finance banks.

Criteria for setting up SFBs

  • Resident individuals/professions with 10 years of experience in finance, Non-Banking Financial Companies (NBFCs), micro finance companies, local area banks are eligible to set up SFBs. The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore.
  • The promoter’s minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40 per cent and gradually brought down to 26 per cent within 12 years from the date of commencement of business of the bank.
  • The foreign shareholding in the small finance bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.
  • The small finance banks will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.
  • SFBs have to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as per RBI norms.
  • At least 50 per cent of its loan portfolio should constitute loans and advances of up to Rs. 25 lakh.

What can Small Finance Banks do?

  • Sell forex to customers.
  • Sell mutual funds, insurance and pensions.
  • Can convert into a full-fledged bank.

What Small Finance Banks can’t do?

  • Extend large loans.
  • Cannot float subsidiaries and deal in sophisticated products.

Challenges to Small Finance Banks

  • Have to compete with existing public sector banks and RRBs.
  • Micro Finance Institution (MFI)/NBFC are specialised in micro lending operations with limited exposure to banking operations; that means they have to hire, train talent from the banking industry.
  • The cost of deposit mobilisation will be higher for these banks as they cover rural and underserved segment.


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