Small Finance Banks UPSC – Features & Regulations in India

When it comes to competitive exams like the UPSC (Union Public Service Commission), having a clear understanding of Small Finance Banks (SFBs) is crucial. These banks have become increasingly important in India’s financial sector because of their significant role in promoting financial inclusion and addressing the financial needs of underserved communities.

In this article, we will explore the fundamental aspects of Small Finance Banks, their functions, and their profound impact on the Indian economy.

What are Small Finance Banks?

Small Finance Banks are a category of banks established under the Reserve Bank of India (RBI) guidelines to provide basic banking services to unserved and underserved segments of the population, including small businesses, micro and small industries, and low-income households. These banks aim to foster financial inclusion by extending credit facilities, deposit accounts, and other financial services to those who have limited access to formal banking institutions.

List of Small Finance Banks in India

Here is a list of Small Finance Banks in India:

  • AU Small Finance Bank
  • Capital Small Finance Bank
  • Equitas Small Finance Bank
  • ESAF Small Finance Bank
  • Fincare Small Finance Bank
  • Jana Small Finance Bank
  • North East Small Finance Bank
  • Suryoday Small Finance Bank
  • Ujjivan Small Finance Bank

Objectives of Small Finance Banks

The objectives of Small Finance Banks (SFBs) are as follows:

  • Promoting financial inclusion
  • Catering to the needs of underserved sections of society
  • Offering basic banking services to unbanked and underbanked regions.
  • Extending credit facilities and deposit accounts to marginalized communities.
  • Focusing on priority sector lending, including agriculture and microenterprises
  • Empowering small businesses and low-income households
  • Leveraging technology for convenient and cost-effective banking services
  • Contributing to inclusive growth and socio-economic development
  • Complying with regulations set by the Reserve Bank of India (RBI)
  • Not-for-profit organizations are owned by the government or state governments.

Also Read: Payment Banks in India

History & Background

The Reserve Bank of India (RBI), as the regulator for banks in India since 1949, has played a crucial role in shaping the banking sector. In the 1960s, the RBI introduced certain privileges for small banks and not-for-profit organizations to encourage their participation in financial inclusion efforts.

However, recognizing the need for specialized institutions dedicated to serving the financial needs of underserved sections of society, the RBI took a significant step in 2015. In that year, the RBI granted licenses to 10 entities to operate as Small Finance Banks (SFBs). This marked a milestone in the evolution of the Indian banking sector, as it paved the way for institutions solely focused on financial inclusion and catering to the needs of individuals and small businesses.

Regulatory Framework for Small Finance Banks

Small Finance Banks are governed by the provisions of the following acts, statutes, and regulations:

  • Banking Regulation Act, 1949
  • Reserve Bank of India Act, 1934
  • Foreign Exchange Management Act, 1999
  • Payment and Settlement Systems Act, 2007
  • Credit Information Companies (Regulation) Act, 2005
  • Deposit Insurance and Credit Guarantee Corporation Act, 1961

In addition to these acts, SFBs are also required to comply with other relevant statutes and directives, as well as the prudential regulations and guidelines/instructions issued by the Reserve Bank of India (RBI) and other regulatory bodies. These regulations ensure the proper functioning, governance, and oversight of Small Finance Banks in India.

Key Features of Small Finance Banks

Small Finance Banks (SFBs) in India were recommended by the Nachiket Mor Committee on Financial Inclusion. They serve as specialized banks with a focus on providing financial services to underserved and unbanked sections of society, particularly in rural and semi-urban areas.

Area of Operations: SFBs primarily operate in smaller areas like rural and semi-urban regions to reach people who have limited access to banking services.

Loan Portfolio: SFBs focus on lending to the MSME sector and cannot provide large loans. At least half of their loans should be for amounts up to Rs. 25 lakhs.

Rural Branches: SFBs are mandated to set up a considerable portion of their branches in rural areas. During the initial three years of operation, 25% of their branches must be established in rural regions.

Non-Banking Financial Services: Unlike traditional banks, SFBs are not allowed to establish subsidiaries to undertake non-banking financial service activities. Their primary focus is on core banking functions, ensuring the provision of essential financial services to their customers. This limitation ensures that SFBs maintain their focus on serving their target customer segments effectively.

Licensing: SFBs are registered as public companies under the Companies Act of 2013, and obtain licenses under Section 22(1) of the Banking Regulation Act of 1949.

Capital Requirements: SFBs are required to have a minimum paid-up capital of Rs. 200 crores. Promoters must contribute a minimum initial stake of above 40%, which needs to be reduced to 26% within 12 years of commencement. This requirement ensures adequate capitalization and financial stability for SFBs.

Priority Sector Lending: SFBs must comply with prudential norms and regulations applicable to commercial banks. They are required to lend 75% of their credit to priority sectors identified by the RBI, such as agriculture, microenterprises, education, and housing.

Branch Distribution: To further enhance financial inclusion, SFBs are mandated to establish at least 25% of their branches in unbanked areas. This directive ensures that areas lacking proper banking infrastructure receive the necessary attention and access to essential banking services.

Foreign Direct Investment (FDI) in Small Finance Bank

Foreign Direct Investment (FDI) in Small Finance Banks (SFBs) follows the FDI policy applicable to private sector banks in India:

  • The maximum foreign investment allowed in a private sector bank is 74% of the paid-up capital.
  • Up to 49% foreign investment is allowed automatically, while beyond 49% and up to 74%, government approval is required.
  • At least 26% of the paid-up capital must be held by residents of India.
  • Foreign institutional investors (FIIs), foreign portfolio investors (FPIs), and individuals are restricted to holding a maximum of 10% of the total paid-up capital.
  • Qualified Foreign Investors (QFIs) are not allowed to hold more than 24% of the total paid-up capital.
  • The QFI limit can be raised to 49% with approval from the Board of Directors and a special resolution passed by the general body.


Small Finance Banks have emerged as vital institutions, playing a pivotal role in fostering financial inclusion and empowering marginalized sections of society. Aspirants preparing for UPSC examinations must familiarize themselves with the concept, functions, and significance of Small Finance Banks, as it helps in understanding the dynamics of India’s banking sector, economic policies, and social development initiatives.

The knowledge of Small Finance Banks equips aspirants with a comprehensive understanding of the Indian economy and its diverse financial institutions, enabling them to tackle related questions with precision and insight during the UPSC examinations.

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