Small Finance Banks

Small Finance Banks are a new class of niche banks created as part of financial inclusion reforms in the mid-2010s. The concept was recommended by the RBI’s Nachiket Mor Committee (2014) to serve the credit needs of small borrowers and encourage formal savings among low-income groups.

RBI issued Guidelines for Licensing of SFBs in November 2014, aiming to enable existing local financial players (like microfinance institutions, local area banks, NBFCs) to become banks. In 2015, RBI granted in-principle licenses to 10 entities to set up Small Finance Banks. These entities included microfinance companies (e.g. Ujjivan, Janalakshmi, Equitas, ESAF, etc.), a Local Area Bank (Capital LAB), and other niche finance firms. By 2016-17, these licensees commenced operations as the first SFBs.

Later, in 2019 and 2021, RBI allowed on-tap licensing for SFBs, leading to a few more entrants: one urban cooperative bank (Shivalik Mercantile Co-op Bank) converted into Shivalik SFB in 2021, and a consortium took over Punjab & Maharashtra Co-op Bank to form Unity SFB in 2021.

As a result, India has 11 SFBs as of 2025.

Objectives and Target Sector

The primary objective of SFBs is to further financial inclusion by providing basic banking services (accepting deposits and lending) to sections unserved or underserved by traditional banks. They focus on small businesses, micro and small industries, small and marginal farmers, and unorganized sector entities.

Essentially, SFBs are designed to take the model of microfinance (small, collateral-free loans to low-income borrowers) and expand it under a regulated bank structure that can also take deposits. By being banks, SFBs can offer a safe place for the poor to save (with deposit insurance coverage) and reduce their cost of funds (since they can use public deposits to on-lend, unlike MFIs that relied on higher-cost wholesale funds).

Key Regulatory Features

Small Finance Banks are given almost the same powers as regular commercial banks, but with certain conditions to keep them focused on their niche:

• Branch Outreach: SFBs must open at least 25% of branches in unbanked rural areas to ensure outreach.
• Deposit Acceptance: SFBs can accept all types of deposits (savings, current, fixed, recurring) from the public. Deposits are insured by DICGC up to ₹5 lakh like any bank.
• Lending Scope: SFBs can lend to all segments, but at least 50% of their loan portfolio must comprise loans up to ₹25 lakh. This ensures they concentrate on smaller loan tickets (micro and small loans).
• Priority Sector Lending: 75% of Adjusted Net Bank Credit must be to Priority Sectors – this is a much higher target than the 40% for other banks, underlining their inclusion mandate.
• Capital Requirement: Minimum paid-up capital was initially ₹100 crore; later raised to ₹200 crore for new SFB applicants. They must maintain capital adequacy (CRAR) as prescribed (generally 15%).
• Promoter Contribution: Promoters must hold at least 40% equity for the first 5 years, and gradually bring it down to 26% within 12 years. This is to ensure stable ownership and then diversified shareholding over time. Also, foreign shareholding in SFBs is allowed up to 74% (as applicable to private banks).
• Transition Path: An SFB must get listed (go public) within 3 years of reaching net worth ₹500 crore (to enhance transparency). After five years of operation, SFBs become eligible to apply to evolve into a universal bank (though none has yet done so, as of 2025).
• Other Operations: SFBs cannot set up big subsidiaries for non-banking activities. They are largely focused on core banking. They can offer forex, ATM/debit cards, and other services as permitted. However, like other banks, they need separate approval to deal in complex products (like derivatives) and they typically stick to simple financial services.

Current SFBs

The first set of 10 SFBs (launched 2016-17) include:

1. AU Small Finance Bank (Rajasthan-based, evolved from an asset finance NBFC)
2. Capital Small Finance Bank (Punjab, converted from Capital Local Area Bank)
3. Equitas SFB (origin: microfinance, based in Tamil Nadu)
4. Ujjivan SFB (origin: microfinance, based in Bengaluru)
5. Janalakshmi -> Jana SFB (origin: microfinance, Bengaluru)
6. ESAF SFB (Kerala, origin: NGO microfinance)
7. Suryoday SFB (Maharashtra, microfinance origin)
8. Utkarsh SFB (Uttar Pradesh, microfinance origin)
9. Fincare SFB (Gujarat/Karnataka, microfinance origin)
10. North East SFB (Assam and NE states, microfinance origin)

Subsequently:

1. Shivalik SFB (2021, first UCB to convert to SFB, based in UP)
2. Unity SFB (2021, new entity formed to take over PMC Bank, based in Mumbai)

There has been consolidation too: Fincare SFB merged with AU SFB in 2024 to create a larger bank. Also, North East SFB was acquired by a fintech firm and renamed “slice” Small Finance Bank in 2025. As a result, we have 11 operational SFBs currently (AU, Capital, Equitas, Ujjivan, Jana, ESAF, Suryoday, Utkarsh, slice (formerly North East), Shivalik, Unity).

These banks, though small in size individually, have rapidly expanded. Many are now listed companies (AU, Ujjivan, Equitas, etc.) and have introduced competitive products in their local markets. For instance, AU SFB offers a full suite of services and has a strong presence in north-west India, while Ujjivan and Equitas have established hundreds of branches targeting urban poor and MSMEs.

Outreach and Impact

Small Finance Banks have significantly increased credit flow to low-income segments. They often continue serving the borrower base of their predecessor microfinance institutions but with added products. For example, an SFB can take a poor woman’s ₹100 savings deposit (which earlier only a microfinance NGO might collect as thrift without formal savings account) and also give her a small loan for enterprise, all regulated under banking norms. SFBs have innovated by using alternative credit scoring, door-step banking, and tie-ups with local intermediaries to reach customers with little to no credit history. They also use technology heavily – many SFBs have simple digital banking apps in local languages.

Because SFBs can offer deposits, they’ve been able to bring a segment of population into mainstream banking. They also often have slightly higher deposit interest rates to attract customers (for instance, some SFBs offer 50-100 basis points higher on fixed deposits than larger banks). This has increased competition for deposits in the market.

On the lending side, SFBs focus on micro-loans, group loans, tiny MSME loans, agro-based loans, and affordable housing loans. By regulation, they cannot dilute this focus much due to the 50% up to ₹25 lakh rule. This means a large part of their portfolio supports micro-entrepreneurs, small shopkeepers, farmers needing small capital, etc. They also lend to the missing-middle segment – slightly larger small businesses that need say ₹10–50 lakh, which may be too small for big banks and too large for microfinance companies.

Regulatory Oversight

RBI supervises SFBs closely like other banks. SFBs are subject to CRR and SLR requirements. Notably, SFBs have been included in the RBI’s Scheduled Banks list, thus they have access to inter-bank markets and RBI liquidity facilities. They must also follow priority sector sub-targets (like a certain % to agriculture, small marginal farmers, microenterprises within that 75%).

Some challenges have emerged: because their customer base is vulnerable, SFBs’ loan portfolios can be at risk during economic shocks (for example, during the COVID-19 pandemic, many SFBs saw higher NPAs as micro borrowers struggled). RBI monitors their asset quality and has encouraged them to diversify within their remit.