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We post articles and blogs on important topics, news, and information related to banking
exams. In this article, the following topic Small Finance Banks from banking section is
explained.

Small Finance Banks

Small finance bank are niche banks in India. Small finance banks have been empowered to
accept the deposits from its customers. Unlike Payments Banks, small finance banks can also
lend money to the people. The objective behind small finance banks is to achieve financial
inclusion to the sections of the economy not being covered by the other banks, such as small
business units, micro and small industries, small and marginal farmers, and people working in
an unorganized sector.
Most of the firms that have received the 'in-principle' approval include micro-financial
institutions which mean, most of the customers of small finance banks will comprise of small
and medium scale enterprises and small businesses. These banks will also be able to provide
secure and legal loans to MSMEs and SMEs, bringing them under the roof of the financial
system.
Small finance banks are yet another step to bring the unbanked sector under the roof of the
banking system. Small finance banks will serve banking services to the unserved sections of
the country, which includes micro and small industries, small and marginal farmers, and other
organized sector entities, at an affordable cost.
Finance Minister Arun Jaitley, in his maiden budget speech in 2014 had said, RBI will
design a framework to license small banks and other differentiated banks. Differentiated
banks which serve the interests of common people are instituted to meet credit and remittance
needs of small businesses, unorganized sector, low-income households, &farmers.

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Regulations:
Small Finance banks must have to obey stricter regulations as formulated by RBI:
- The banks must use the word small finance bank in its name.
- Small Finance Banks cannot set up subsidiaries on its own to undertake non-banking
financial service activities.
- 75% of banks Adjusted Net Bank Credit (ANBC) should be provided to the priority sector
as defined by RBI in PSL guidelines.
- Maximum loan size to a single individual person cannot exceed 10% of its total capital
funds; and cannot exceed 15% in the case of an entity/firm.
-50% of small finance bank loans should comprise ofatleast loans and advances of up to25
lakhs.
- Small banks can provide all kinds of financial services like distribution of mutual
funds,pension products, insurance products, and so on, but not without prior approval from
the RBI.
- Small finance banks will have to follow all the norms and regulations of the RBI as there on
the existing commercial banks. It includes maintaining CRR and SLR.
- The minimum capital required to open small finance bank is 100 crores.

-A promoter's minimum initial contribution to the paid-up equity capital of small finance
banks should be at least 40% which can be further brought down to 26% within 12 years
from the actual date of commencement of bank operations.
- A small finance bank can be transformed into a full-fledged bank, only after getting RBI's
approval.
- A fundamental requirement is that small finance banks must have 25% of their branches set
up in unbanked rural areas.
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