Small Finance Banks: A Detailed Overview
Small Finance Banks (SFBs) were brought in to the Indian banking structure in 2015 to meet the unique needs of specialised clients. Banks such as these aspire to increase the nation’s access to basic banking services and enhance financial integration.
Small Finance Banks are not entirely a fresh idea; several industrialised nations have already had this form of institution. 10 applicants received licences from the RBI in 2015 to start small finance banks in India.
Small Finance Bank’s main goal is to offer essential financial services to neglected and undeserving segments of population. Small finance banks are permitted to grant loans to individuals as well as take deposits from individuals. It seeks to improve financial system and to support small businesses, economically disadvantaged farmers, micro- and small-scale enterprises, and organisations in the unorganised sector of the economy.
Characteristics of Small Finance Banks
- The required minimum amount of capital to launch a small finance bank is INR 100 crore.
- Any small financing bank that is licenced is required to locate a minimum of 25% of its branches in unbanked areas of the country.
- Regardless of the expectations and requirements of its clients, small finance banks are permitted to engage in exchange-rate transactions.
- The Reserve Bank of India has established standards for how small finance institutions are to operate. Keeping up the SLR (Statutory Liquidity Ratio) and CRR (Cash Reserve Ratio) are two examples.
- These institutions are also able to engage in mutual fund investments trading, the purchase and sale of insurance goods, and the provision of pension plans. However, they must secure a licencing and the necessary Reserve Bank of India permission.
Role and Functions of Small Finance Banks
Overall, setting small financing institutions are essential for advancing financial stability, providing formal banking services to disadvantaged groups, and fostering economic growth in underdeveloped areas. Here, are some basic roles and functions of small finance banks mentioned below:
- A small finance bank’s main responsibility is providing people with low incomes and their enterprises with necessary financial services.
- Small Finance Banks have taken up the monetary institutions gap left by the inadequate performance of Big Banks and Cooperative Banks in unbanked, disadvantaged and ignored areas.
- The dual objectives of establishing a bank regulatory framework for encouraging remote and semi-urban investments and offering lending opportunities for the expansion of economic activity in underprivileged regions are achieved by SFBs.
- SFBs may play a crucial role in expanding micro-loans and low-cost deposits in underprivileged communities.
- Small financing banks adopt innovation and technology to boost productivity, increase customer service, and broaden the audience they serve. To provide its consumers with practical and readily available banking options, they make use of electronic platforms, smartphone banking, and web-based banking services.
Risk Management: Small Finance Banks
A crucial component of the activities of small finance banks is risk management. As banking organisations, they must successfully identify, evaluate, and effectively handle various other variety of risks. Here are a number crucial techniques used by small finance banks to undertake efficient risk management:
- NPAs under control: the medium of comparatively improved risk management of their investments, small financing banks (SFBs) have successfully been managing to maintain their the amount of non-performing assets (NPAs) under check.
- Security: To protect its information technology (IT) systems and platforms, small financial banks have created strong data retention and cyber security frameworks.
- New Approaches: The credit risk has been dramatically decreased by the use of Portfolio Profiling, Early Warning Framework, as well as Rapid Portfolio Evaluation, and Periodic Tracking of Significant Valuable Clients in credit management and tracking.
- Reputational risk: It is when a financial institution’s image is harmed or negatively seen by the general public as a result of certain behaviours, occurrences, or affiliations. Small financing banks must take steps to reduce reputational risk by building trusting connections with clients, offering superior client care, and upholding moral standards. They ought to include efficient communication and public relations plans in place to quickly handle any problems with their reputations. Monitoring social media and other channels is another aspect of reputational risk management that identifies and addresses any reputational issues.
- Credit Risk: Small financing institutions frequently work with clients that have a spotty a solid credit record or no assets. As a result, credit risk management is crucial to reducing the likelihood of failures to repay loans This entails doing in-depth credit analyses, confirming borrower data, applying solid insurance procedures, and establishing sensible lending limits. Assessing borrower performance, putting early warning systems into place, and responding quickly to probable defaults or failures are other components that constitute successful credit risk management.
Small Finance Banks: Study Material
Learning Sessions is offering free PDF study guide on Small Finance Banks which is great tool for the students looking to improve their understanding and awareness of this interesting subject. It is possible for aspiring professionals, students, and practice people to build a solid base in this area with the use of thorough and easily downloadable study material offered by us free of cost.
To access the comprehensive pdf prepared by the expert teachers of Learning Sessions, check the following:
| S.NO. | Paper | Module | Chapter | Action |
| 1 | SFB | A | Financial System | Download |
| 2 | SFB | A | Banking Regulations | Download |
| 3 | SFB | A | Setting Up of a Small Finance Bank | Download |
| 4 | SFB | A | Financial Inclusion and Financial Literacy | Download |
| 5 | SFB | A | Government Sponsored Credit- Linked Schemes | Download |
| 6 | SFB | A | Risk Management | Download |
Comparison with Other Banking Institutions
| Parameters | Small Finance Banks | Commercial Banks | Micro-finance Institutions |
| Regulatory Framework | In India, small finance banks must go by rules set forth by the Reserve Bank of India (RBI) specifically for small finance banks | Under the Banking Regulation Act, commercial banks are likewise subject to RBI administration. They cater to numerous consumer segments by providing a broad range of banking products and services. | In most cases, the financial government agencies in each nation, such as the RBI in India, govern MFIs. They follow particular rules for conducting micro-finance business. |
| Scale and Network | Small finance banks are often more regionally focused and operate on smaller levels than commercial banks. In order to make sure that consumers in towns and villages have immediate access to financial services, they frequently set up a branch office network in underserved areas. | Commercial banks, particularly the larger ones, conduct business on an nationwide or worldwide level and have adequate office networks, ATM networks, and online banking platforms. They offer broad exposure and accessibility to financial services in diverse places. | MFIs come in a range of sizes, from modest local groups to major regional or international organisations. With respect to the breadth of their business activities, their branch networks may target particular areas or groups. |
| Target Customers | Small finance banks tend to concentrate on the underprivileged and unbanked population, which includes those living in areas that are semi-urban or rural, families with low incomes, entrepreneurs with small businesses, and micro and small-scale enterprises. They emphasise spreading traditional banking services to such populations and promoting financial empowerment. | These financial institutions offer a wider range of services to people in general, small, medium, and large companies, as well as other organisations. They offer a variety of banking services to both retail and business clients. | MFIs concentrate on offering disadvantaged people and groups who have little exposure to formal banking services financial assistance, particularly microcredit. Frequently, their target consumers are credit- and collateral-less. |
Conclusion: Learning Sessions
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