Small Finance Banks in India

It all started with Local Area Banks (LAB) back in 1996 — an initiative by the then Prime Minister to operate locally in semi-urban and rural areas (Tier 3 and Tier 4 cities) — where people are normally disappointed when it comes to affordable credit access.

RBI in the year 2012 got active and on September 16, 2015 it released a list of 10 entities that were given a license to operate as a Small Finance Bank (SFB) in accordance with the Union Budget of 2014–2015.

The response to Pradhan Mantri Jan Dhan Yojana — a government’s initiative to encourage people to open a savings account — has been bleak. That having said, 38% of bank accounts are inactive. No deposits/withdrawals for over a year.

What are Small Finance Banks and what’s their mandate?

They offer:

-Basic Banking Services: They accept deposits and lend money to underserved sections of the society

-Mutual Funds: They distribute Mutual Funds Units, Insurance Products, Pension Products — after RBI’s approval.

-Foreign Exchange — They can become authorized dealers of Foreign Exchange

They don’t offer:

-They cannot set up subsidiaries to offer non-banking financial service activities.

-They cannot lend to big corporations and groups

-Cannot open branches without RBI’s approval in the first 5 years of operations.

-They cannot act as a business correspondent of any bank

Who all does it woo?

Small Farmers, Micro and Small Business Units and Industries, your house helps, and the unorganized sector at large.

A Scheduled Small Finance Bank?

The small finance banks are given scheduled bank status once they commence their operations, and found suitable as per Section 42 (6) (a) of the Reserve Bank of India Act, 1934.

They face some problems too:

-The pandemic bruised balance sheets

-Share prices hitting at an all time low

-Quick exits of key executives raise concerns

Over the years, SFBs have played an important role in establishing access for the unbanked population and will continue to do so.

List of Small Finance Banks in India

I love tracking the environment, banking and fintech space. I Copywrite. :)

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