Small Finance Banks (SFBs) – RBI | UPSC – IAS

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Small Finance Banks (SFBs) – RBI | UPSC – IAS

Small finance banks can provide basic banking service of acceptance of deposits and lending. Small finance banks can play an important role in the supply of credit to micro and small enterprises, agriculture and banking services in unbanked and underbanked regions in the country, the RBI has decided to licence new “small finance banks” in the private sector.

The aim behind these to provide financial inclusion to sections of the economy not being served by other banks, such as:-

Small business units,
Small and marginal farmers,
Micro and small industries and
Unorganised sector entities

Objective of Small finance banks | UPSC – IAS

The objectives of setting up of small finance banks will be for furthering financial inclusion by:-

Provision of savings vehicles primarily to unserved and underserved sections of the population, and Supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, through high technology-low cost operations

They were proposed by the Nachiket Mor Committee of RBI, as one of the differentiated banking system for credit outreach and announced in the annual Budget of 2014. Currently, SFBs constitutes 0.2% of the total deposits of all scheduled commercial banks and makes up 0.6% of the total lending undertaken by the scheduled commercial banks in India.

Small finance banks are private financial institution for the objective of financial inclusion without any restriction in the area of operations, unlike the Regional Rural Banks or Local Area Banks. For example:- Some of the operational Small Finance Banks in India are:

- Ujjivan Small Finance Bank.
- Janalakshmi Small Finance Bank.
- Equitas Small Finance Bank.
- A U Small Finance Bank.
- Capital Small Finance Bank.
- ESAF Small Finance Bank.
- Utkarsh Small Finance Bank.
- Suryoday Small Finance Bank.
- Fincare Small Finance Bank

Need for Small Finance Banks | UPSC – IAS

Differentiated banking to cater large population: India has second-largest unbanked population in the world where more than 200 million people do not have a bank account and many rely on cash or informal financing. Therefore, SFBs provide access to finance to a large unbanked population.
Priority sector lending: SFBs play a key role in the priority sector lending space as their main focus is the unserved and underserved segment.
Financial inclusion of women: Most of the Small Finance Banks were earlier microfinance companies – to provide loans to women. Now that these have become a bank, female customers can avail full banking solutions. Also, through different CSR initiatives, Small Finance Banks reach out to women customers and make them understand the need of financial planning and banking services.
Social Impact: The SFBs are now looking beyond the simple metric of “income improvement” to other indicators of positive social impact, like customer employment characteristics, customer distribution between urban and rural markets and women’s engagement. SFBs not only serve to provide banking solutions but empower the socio-economic progress of its consumers. RBI states that small banks will act as a savings vehicle to these segments of the population.