SMALL FINANCE BANKS (Syllabus: GS Paper 3 – Economy)

Context: The Reserve Bank of India (RBI) licensed 10 small finance banks (SFBs) to bolster financial inclusion. The Report on Trend and Progress of Banking in India (FY23) notes that some microfinance institutions among SFBs earlier retained their business models.

Small Finance Banks (SFBs):

• About: SFBs are banks that have limited financial resources and are regulated by the Reserve Bank of India.
• Purpose of SFBs: SFBs aim to provide financial inclusion to low-income individuals and underserved communities who are often excluded from traditional banking systems.
• Financial Services Offered by SFBs: SFBs facilitate access to financial products such as small loans, savings, insurance, and basic banking services for their target segments.
• Regulatory Framework for SFBs: These are registered as public limited companies under the Companies Act, 2013, and are governed by various statutes including the Banking Regulations Act, 1949, and RBI Act, 1934.
• RBI Guidelines:

oSFBs are granted scheduled bank status under section 42 of the RBI Act, 1934, after becoming operational.

oThey must primarily focus on providing financial services to the unbanked and underbanked.

oSFBs must maintain a minimum CRAR of 15% and extend 75% of their net bank credit to Priority Sector Lending.

oThey are mandated to open 25% of branches in unbanked rural areas and have a minimum paid-up capital of Rs. 200 crore.

• Loan Portfolio and Compliance: SFBs are required to maintain at least 50% of their loan portfolio as microfinance and advances up to Rs. 25,00,000.
• They must adhere to prudential norms and regulations regarding income recognition, asset classification, and provisioning.
• Technology Adoption: SFBs are encouraged to leverage technology to enhance operational efficiency and expand their reach to target segments.