Overview: Small Finance Banks (SFBs) are a category of scheduled commercial banks designed to focus on financial inclusion and provide banking services to specific segments. Here are key aspects of Small Finance Banks in India:
- Objective and Focus:
- Financial Inclusion: SFBs aim to promote financial inclusion by catering to the needs of small business units, small and marginal farmers, micro and small industries, and entities in the unorganized sector.
- Not Exclusive: While their primary focus is on financial inclusion, SFBs are not exclusively restricted to these sectors.
- Promoters and Structure:
- Promoters: SFBs can be promoted by individuals, corporates, trusts, or societies.
- Legal Structure: They are established as public limited companies in the private sector, licensed under the Banking Regulation Act, 1949, and governed by RBI Act, 1934.
- Area of Operations:
- No Restriction: SFBs can operate without restrictions in terms of the area, unlike regional rural banks (RRBs) or local area banks.
- Minimum Capital Requirement: A minimum capital of 100 crores is prescribed for SFBs.
- Regulatory Framework:
- Compliance: SFBs are subject to all prudential norms and regulations of RBI applicable to existing commercial banks, including maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
- Priority Sector Lending (PSL): SFBs are required to extend 75% of credit to sectors eligible for classification as priority sector lending by the Reserve Bank.
- Branches and Rural Presence:
- Branches: At least 25% of the branches of SFBs should be in unbanked rural centers.
- Loan Portfolio: A minimum of 50% of the loan portfolio should constitute loans and advances of up to 25 lakhs.
- Non-Risk Sharing Financial Services:
- Allowed Activities: SFBs can undertake non-risk sharing financial services activities that do not require a commitment of their funds. These include the distribution of mutual fund units, insurance products, pension products, etc.
- Foreign Exchange Business: SFBs can set up dealerships in foreign exchange business.
- Conversion and Licensing:
- Conversion: Existing NBFCs, microfinance institutions, and local area banks can opt for conversion into Small Finance Banks.
- On-Tap Licensing: RBI introduced an ‘on-tap’ licensing process in 2019, allowing it to accept applications and grant licenses for SFBs throughout the year.
- Background:
- Recommendation: The concept of Small Finance Banks was recommended in the 2009 report titled ‘A Hundred Small Steps’ of the Committee on Financial Sector Reforms headed by Dr. Raghuram Rajan.
- Operations: Many SFBs started operations based on these recommendations.
Conclusion: Small Finance Banks play a crucial role in addressing the financial needs of specific segments, contributing to financial inclusion and promoting economic development. The regulatory framework ensures compliance with prudential norms while allowing flexibility in serving diverse customer segments.
FAQs
1. What are Small Finance Banks (SFBs)?
A: Small Finance Banks (SFBs) are specialized banks in India that primarily cater to the financial needs of underserved and unserved sections of the population, including small business units, micro and small industries, and unorganized sector entities. They aim to provide basic banking services like deposits and lending to these segments, which are often neglected by traditional banks.
2. What is the purpose of establishing Small Finance Banks?
A: The main objective behind establishing Small Finance Banks is to promote financial inclusion by extending banking services to the unbanked and underbanked sections of society. These banks facilitate access to credit and other financial products for individuals and businesses in rural and remote areas, helping them participate in the formal financial system.
3. How do Small Finance Banks differ from other types of banks?
A: Small Finance Banks differ from traditional banks and other specialized banks in their focus on serving the needs of marginalized and financially excluded segments. They operate under stricter regulations that mandate a certain percentage of their lending to priority sectors like agriculture, small businesses, and microfinance. Additionally, they have smaller geographical areas of operation compared to larger banks.
4. What services do Small Finance Banks offer?
A: Small Finance Banks offer a range of banking services including savings accounts, current accounts, fixed deposits, recurring deposits, remittance services, and loans such as small business loans, agricultural loans, microloans, and personal loans. They leverage technology and innovative delivery channels to reach customers in remote areas efficiently.
5. How are Small Finance Banks regulated?
A: Small Finance Banks are regulated by the Reserve Bank of India (RBI) under the provisions of the Banking Regulation Act, 1949. They are subject to similar regulatory frameworks as commercial banks but with certain relaxations and concessions aimed at promoting financial inclusion. The RBI monitors their operations closely to ensure compliance with regulations and adherence to the priority sector lending targets.
In case you still have your doubts, contact us on 9811333901.
For UPSC Prelims Resources, Click here
For Daily Updates and Study Material:
Join our Telegram Channel – Edukemy for IAS
- 1. Learn through Videos – here
- 2. Be Exam Ready by Practicing Daily MCQs – here
- 3. Daily Newsletter – Get all your Current Affairs Covered – here
- 4. Mains Answer Writing Practice – here
