In India, there are still a majority of rural people who do not have access to basic banking services because there are no bank branches. These areas are usually the areas that will have a low volume of transactions and thus will supposedly result in a high cost of operations.

Reserve Bank of India has permitted private players in 1996 to set up the Local Area Banks (LAB). There are 4 LABs that are functioning satisfactorily at the present & they are playing an important role in supplying credit to micro and small enterprises (MSEs), agriculture and banking services in the unbanked as well as under-banked regions. 

In July 2014, Reserve Bank of India had issued new guidelines to license small finance banks in the private sector with intention to strengthen the existing system.

The objective of these small banks will be to include the underserved and unserved population in the extension of basic banking services as well as to provide them the credit facility so that it is easy for them to start their small businesses. 

It also proposes to provide facilities to small farmers, micro and small industries and other unorganised sectors in their areas by using high technology and low-cost operations.



These small banks are characterized by following features:

  • These banks can accept deposits just like commercial banks which could be in the form of saving, current, recurring and fixed. 
  • The small finance banks are also allowed to lend money which is unlike any payment Bank. 
  • To extend the branches by these banks, prior-approval will be required for the initial 3 years. 
  • The area of operations of small finance banks will be restricted so that people can feel their services as a form of local bank. 
  • Licenses to open the small banks can be applied by Non Banking Financial Companies for any individual who has an experience of 10 years and banking. 
  • The main target of small banks includes small businesses and MSMEs’. 
  • These banks are disallowed to lend money to big businesses or industries.



SOME OF THE CONDITIONS FOR SETTING UP SMALL BANK: There are some conditions which are required to set a small bank or which are required before one applies for the license to start a Small Finance Bank: 

  • The minimum requirement for paid up equity capital is Rs. 100 crore. 
  • Banks are required to have the words ‘Small Finance Bank’ and its name. 
  • It is required that these banks must set up 25% of its branches in areas where there are currently no other banks operating. 
  • These banks cannot have subsidiaries which provide non-banking financial services. 
  • These banks are required to advance money to priority sectors which have been categorised as one by RBI a 75% of its ANBC (Adjusted Net Bank Credit). 
  • The maximum size of the loan that can be provided to a single person < or = 10% of its total capital funds & in case it is to be provided to a group < or = 15% of its total capital funds. 
  • The small banks can provide financial services (after getting the approval of Reserve Bank of India) such as insurance products, pension products, distribution of units of mutual funds. 
  • These banks can transform into full-fledged banks after getting the approval of the Reserve Bank of India.



Following are some of the differences between a small finance bank and a payment Bank:

Small Finance Banks  Payment Banks 
These banks can accept deposits and can offer products of loan as well. These banks can accept deposits of to the amount of Rs.100000 per individual but are disallowed to lend money to the people.
Deposits can be in the form of fixed deposits, term deposits, any other non-resident Indian deposits and recurring deposits. No deposits can be accepted by these banks.
Services are provided to the unorganised sector and to small farmers and MSMEs. Their services are provided to migrant labour work forces, households which have low incomes, small businesses and other entities in the unorganized sector.
These banks cannot set up ATMs of their own.


List of Small Financial banks and Their Headquarters

Name of the Small Financial bank Head quarters

Name of the Small Finance Bank Headquaters
Au Small Finance Bank Limited (AUBANK)  Jaipur, Rajasthan
Equitas Small Finance Bank  Chennai, Tamil Nadu
Utkarsh Small Finance Bank  Varanasi, U.P.
Capital Lab Small Finance Bank  Jalandar, Punjab
ESAF Small Finance Bank  Thrissur, Kerala
FINCARE Small Finance Bank Limited Bengaluru, Karnataka
Suryoday Small Finance Bank  Navi Mumbai
Janalakshmi Small Finance Bank  Bengaluru, Karnataka
North East Small Finance Bank (NESFB)-RGVN Micro Finance Ltd.  Guwahati, Assam
Ujjivan Small Finance Bank  Bengaluru, Karnataka


These banks will basically provide the basic banking services such as acceptance of deposits and offering of loans in the areas which remain either unserved or underserved. 

Their main priority will be to provide banking services to small and marginal farmers, micro and small industries, small business units and the entities working in the unorganised sector. There will be no restriction in the area of operations of these banks.



As mentioned earlier, a minimum of Rs. 100 crore is required in the form of paid-up equity capital to open a small finance Bank.



As an initial contribution in the paid-up capital of a small finance Bank which is required to be contributed by promoters is 40%. This contribution can be gradually reduced to 26% in the 12 years from the commencement of banking business.



The percentage of foreign investment in small finance banks will be as per the FDI policy (foreign direct investment) which is applicable for the private sector (as amended from time to time).



The small finance Banks are also subjected to the Prudential norms and regulations issued by Reserve Bank of India just as they are applicable to the commercial banks. It includes the requirement to maintain CRR and SLR. There is no relaxation provided to comply with the statutory provisions. 

These banks need to extend 75% of its adjusted net bank credit to the sectors which have been classified in priority sector lending by RBI. 

A minimum of 50% of its loan portfolio should constitute of loans and advances of upto Rs.25 lakh.



In case these small finance banks want to become universal banks, they are required to fulfill the minimum criteria of paid up capital or net worth requirement which is applicable to Universal banks as well as must have a satisfactory track record performance as a small finance Bank. This transition will also depend on the outcome of due diligence performed by the Reserve Bank of India.


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