Q. What is the purpose of setting up of Small Finance Banks (SFBs) in India?

  1. To supply credit to small business units
  2. To supply credit to small and marginal farmers
  3. To encourage young entrepreneurs to set up business particularly in rural areas.

Select the correct answer using the code given below:

  • 1 and 2 only
  • 2 and 3 only
  • 1 and 3 only
  • 1, 2 and 3

Answer: (a) 1 and 2 only

Small Finance Banks (SFBs):
  • SFBs are specialized banks that are licensed by RBI to provide financial services and products to low-income individuals and underserved communities, including microfinance and micro-enterprise services, as well as other basic banking services. 
  • Aim:
    • To provide financial inclusion to these segments of the population who are often excluded from the traditional banking system. 
    • SFBs help them to have access to financial products such as small loans, savings, insurance, and other basic banking services.
  • Regulation:
    • SFBs are registered as public limited companies under the Companies Act, 2013 and governed by Banking Regulations Act, 1949; RBI Act, 1934 and other relevant Statutes and Directives from time to time. 
    • All prudential norms and regulations of the RBI as applicable to existing commercial banks, including the requirement of maintenance of CRR and SLR are also applicable to SFBs.
      • Also, according to RBI, if an SFB aspires to transit into a universal bank, it has to have a satisfactory track record of performance for a minimum period of 5 years.
  • The guidelines for SFBS were introduced in 2014 by RBI. RBI Guidelines on SFBs in India are:
    • SFBs are granted the scheduled bank status after being operational and are deemed suitable under section 42 of the RBI Act,1934. 
    • SFBs are required to primarily focus on providing access to financial services to the unbanked and underbanked segments of the population.
    • They are required to maintain a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 15%.
    • They are required to extend 75% of their Adjusted Net Bank Credit to Priority Sector Lending.
    • SFBs are required to open at least 25% of their total branches in unbanked rural areas.
    • The minimum paid-up voting equity capital for small finance banks shall be Rs.200 crore.
    • SFBs are required to maintain at least 50% of their loan portfolio as microfinance and advances of up to Rs. 25,00,000.
    • SFBs are required to comply with various prudential norms and regulations related to income recognition, asset classification, and provisioning.
    • SFBs are encouraged to adopt technology to improve their operational efficiency and reach the target segments.
  • Eligibility:
    • Resident individuals/ professionals (Indian citizens), singly or jointly, each having at least 10 years of experience in banking and finance at a senior level.
    • Companies and societies owned and controlled by residents.
    • Entities such as microfinance institutions, non-banking financial companies (NBFCs), local area banks and payment banks that are controlled by residents can also convert into Small Finance Banks.
      • Also, Urban Cooperative Banks(UCBs) desirous of converting to SFB may convert to SFB after ensuring compliance with the guidelines.
  • Paid Up Capital Requirement:
    • The minimum paid-up voting equity capital for small finance banks shall be Rs.200 crore, except for such small finance banks which are converted from UCBs.