Small Finance Banks & Payment Banks – General Knowledge


Small Finance Banks & Payment Banks – General Knowledge

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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 the banking section is explained.

Small Finance Banks

Small finance bank is 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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Small Finance banks must have to obey stricter regulations as formulated by RBI:

– The banks must use the word “small finance bank” in their name.

– Small Finance Banks cannot set up subsidiaries on its own to undertake non-banking financial service activities.

– 75% of the bank’s 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 a 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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