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Small Finance Bank In India: Overview, Lists & Eligibility

Small Finance Banks

Small Finance Banks (SFBs) are specialized financial entities operating in India, with a primary focus on offering basic banking and financial services to underserved and unbanked segments of the population, particularly in rural and semi-urban regions. These banks play a pivotal role in the government’s initiatives to foster financial inclusion and expand banking facilities across the nation. Understanding the characteristics and functions of Small Finance Banks is crucial for aspirants preparing for banking awareness sections, and this comprehensive information aims to fulfill their needs.

History of Small Finance Banks

Small Finance Banks (SFBs) are a special kind of banks in India. When a bank has an SFB license, it can do basic banking activities like taking deposits from people and giving out loans. Here is a brief history of Small Finance Banks in India.

  1. In July 2014, the Reserve Bank of India (RBI) made initial guidelines for small finance banks and asked for feedback from the public.
  2.  In November 2014, the final rules for small finance banks were issued by RBI.
  3.  Interested organizations had to apply by January 2015.
  4. In February 2015, RBI listed 72 groups that applied for a small finance bank license.\
  5. An advisory committee led by Usha Thorat was set up to evaluate the applications.
  6.  By September 2015, RBI gave temporary licenses to ten groups, mainly microfinance NBFCs, to become small finance banks within a year.
  7.  Capital Small Finance Bank became the first to start, opening branches in April 2016.
  8. In April 2021, RBI approved Shivalik Mercantile Co-operative Bank to become India’s first urban co-operative bank to transform into a Small Finance Bank.

Acts Applicable On Small Finance Banks

The small finance bank shall be registered as a public limited company under the Companies Act, 2013. The following acts apply to Small Finance Banks.

  • It will be licensed under section 22 of Banking Regulation Act, 1949
  • Foreign Exchange Management Act, 1999
  • Reserve Bank of India Act, 1934
  • Payment & Settlement Systems Act, 2007
  • Credit Information Companies (Regulation) Act, 2005
  • Deposit Insurance and Credit Guarantee Corporation Act, 1961

Small Financial Banks and Objectives

Here are the objectives of establishing Small Finance Banks in India. The candidates must remember these points for use in descriptive answers and essays.

  1. Financial Inclusion: Small Finance Banks (SFBs) strive to advance financial inclusion by serving the requirements of small business enterprises, small and marginalized farmers, micro and small-scale industries, as well as entities operating in the informal sector.
  2. Savings Options: Providing savings options mainly to those who currently lack them.
  3. Credit Support: Offering loans to small businesses, farmers, micro and small industries, and unorganized sector entities.
  4. Alternative Institution: Small finance banks possess the capability to offer an alternative to certain established institutions, given their specific emphasis on catering to small and medium enterprises, the informal sector, as well as small and marginalized farmers. This strategic focus aims to bolster financial inclusion efforts and cater to diverse underserved clientele in rural areas, as well as tier three and four cities and towns.
  5. High-Tech, Low-Cost Approach: Using advanced technology to keep operations efficient and costs low.

Regulatory Provisions Related To Small Finance Banks

Here are a few regulatory guidelines as released by the Reserve Bank of India. The points below will help candidates to know who can apply for Small Finance Bank.  Here are a few regulatory provisions related to Small Finance Bank In India.

  1. Existing NBFCs, MFIs, and LABs can become small finance banks.
  2. They can be promoted by individuals, corporates, trusts, or societies.
  3. Established as public limited companies under the Companies Act, 2013.
  4. Governed by RBI Act, 1934, Banking Regulation Act, 1949, and relevant laws.
  5. No regional restrictions.
  6. Aim to promote rural savings and provide credit for local economic activities.
  7. 75% of net credits in priority sector lending, 50% of loans in ₹25 lakh range.
  8. Minimum paid up capital requirement of ₹200 crore.
  9. Promoters need 10 years of banking and finance experience.
  10. The initial promoter stake is 40%, reduced to 15% in 15 years from the date of commencement of business of the bank.
  11. No joint ventures or foreign shareholding is allowed as per FDI rules.
  12. Mandatory listing within three years at a net worth of ₹500 crore, voluntary below that.

Guidelines Of RBI Related To Operations Of Small Finance Banks

Here are a few guidelines issued by RBI, that oversee the operational aspects of Small Finance Banks. The candidates must note that like any other banks, some provisions like CRR etc. apply to Small Finance Banks.

Guidelines Of RBI: Small Finance Banks
Aspect Details
Minimum Paid-up Equity Capital INR 200 crore
Name Requirement Must include the words “Small Finance Bank” in the name
RBI Approval for Financial Operations Prior approval needed for activities like mutual fund distribution, pension, and insurance products.
Branches in Unbanked Areas 25% of branches must be in unbanked parts of the country
Reserve Requirements Maintain CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio)
Priority Sector Lending 75% of Adjusted Net Bank Credit (ANBC) to eligible priority sectors
Loan Portfolio Composition At least 50% of loan portfolio for loans and advances up to INR 25 lakh.
Transition to Universal Bank Allowed, subject to meeting universal bank capital/net worth requirements.
Business Correspondent (BC) Role Cannot act as BC for other banks, but can have its own BC network.

Scope of Activities of Small Finance Banks

The scope of activities for small finance banks includes:

  1. Basic Banking Services: Offering a range of basic banking services such as deposit acceptance, lending, and other financial transactions.
  2. Financial Inclusion: Focusing on providing banking services to unserved and underserved sections of the population, including rural and semi-urban areas.
  3. Microfinance: Providing credit and financial services to small and marginal farmers, micro and small industries, small business units, and other unorganized sector entities.
  4. Priority Sector Lending: Extending a significant portion of their credit to priority sectors as defined by the Reserve Bank of India (RBI).
  5. Unbanked Regions: Establishing a certain percentage of branches in unbanked parts of the country to promote financial access.
  6. Technology-driven Operations: Leveraging high technology and low-cost operations to ensure efficient and accessible banking services.
  7. Mutual Fund Distribution: With prior RBI approval, small finance banks can distribute mutual fund units.
  8. Pension and Insurance Products: Subject to RBI approval, offering pension and insurance products to customers.
  9. Retail Banking: Engaging in retail banking activities, including savings and current accounts, fixed deposits, remittances, and payment services.
  10. Non-Resident Indian (NRI) Services: Providing banking services to Non-Resident Indians, subject to RBI regulations.
  11. Corporate Banking: Offering banking services to small and medium-sized enterprises (SMEs) and other corporate entities.
  12. Housing Finance: Extending credit for housing and real estate-related activities.
  13. Mobile and Digital Banking: Emphasizing mobile and digital banking services to enhance customer convenience and accessibility.
  14. Financial Literacy and Education: Conducting financial literacy programs to educate customers about banking and financial matters.
  15. Promotion of Self-Help Groups (SHGs): Collaborating with self-help groups for micro-credit and other financial services.
  16. Community Development: Participating in community development initiatives and contributing to the local economy.

List of Small Finance Banks In India

Here is a list of a few small finance banks in India.

List of Small Finance Banks In India
Sl.No. Original Licensee/Promoter Commenced Bank Name Headquarters
1 Ujjivan Financial Services Pvt Ltd 1 February 2017 Ujjivan Small Finance Bank Bangalore
2 Janalakshmi Financial Services Pvt Ltd 29 March 2018 Jana Small Finance Bank Bangalore
3 Equitas Holdings Pvt Ltd 5 September 2016 Equitas Small Finance Bank Chennai
4 Au Financiers India Ltd 19 April 2017 AU Small Finance Bank** Jaipur
5 Capital Local Area Bank Ltd 24 April 2016 Capital Small Finance Bank Jalandhar
6 ESAF Microfinance 17 March 2017 ESAF Small Finance Bank Thrissur
7 RGVN North East Microfinance Ltd 17 October 2017 North East Small Finance Bank Guwahati
8 Suryoday Microfinance Pvt Ltd 23 January 2017 Suryoday Small Finance Bank Navi Mumbai
9 Utkarsh Microfinance Pvt Ltd 23 January 2017 Utkarsh Small Finance Bank Varanasi
10 Shivalik Mercantile Co-operative Bank Ltd 26 April 2021 Shivalik Small Finance Bank Noida
11 Centrum Financial Services Limited and BharatPe 1 November, 2021 Unity Small Finance Bank Delhi

**On April 1st, 2024, RBI has approved the merger of Fincare Small Finance Bank into AU Small Finance Bank. So, as on April 1st, 2024, there are total eleven Small Finance Banks in India. 

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What are Small Finance Banks In India?

The Small Finance Bank specialized financial institutions in India that focus on providing basic banking and financial services to underserved and unbanked sections of the population, especially in rural and semi-urban areas.

Who Regulates Small Finance Banks In India?

The Reserve Bank Of India is the regulator of Small Finance Banks In India.

What is the minimum paid up capital required to set up SFBs?

A minimum paid-up capital of INR 200 crore is necessary for establishing Small Finance Banks (SFBs).