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

Context: The small finance bank model may still be testing the water some 10 years since its launch. According to banking experts, the regulator has taken a cautious approach in granting approvals.

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:

• SFBs are granted scheduled bank status under section 42 of the RBI Act, 1934, after becoming operational.
• They must primarily focus on providing financial services to the unbanked and underbanked.
• SFBs must maintain a minimum CRAR of 15% and extend 75% of their net bank credit to Priority Sector Lending.
• They are mandated to open 25% of branches in unbanked rural areas and have a minimum paid-up capital of Rs. 200 crore.