What are Small Finance Banks (SFBs)?

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What are Small Finance Banks (SFBs)? Blog Image


The Reserve Bank of India (RBI)-appointed director, recently resigned from the board of Ujjivan Small Finance Bank (SFB).

About Small Finance Banks (SFBs):

  • SFBs are specialized banks that are licensed by RBI to provide financial services and products to low-income individuals and underserved communities, including microfinance and micro-enterprise services, as well as other basic banking services. 
  • Aim:
    • To provide financial inclusion to these segments of the population who are often excluded from the traditional banking system. 
    • SFBs help them to have access to financial products such as small loans, savings, insurance, and other basic banking services.
  • SFBs are registered as public limited companies under the Companies Act, 2013 and governed by Banking Regulations Act, 1949; RBI Act, 1934 and other relevant Statutes and Directives from time to time. 
  • The guidelines for SFBS were introduced in 2014 by RBI. RBI Guidelines on SFBs in India are:
    • SFBs are granted the scheduled bank status after being operational and are deemed suitable under section 42 of the RBI Act,1934. 
    • SFBs are required to primarily focus on providing access to financial services to the unbanked and underbanked segments of the population.
    • They are required to maintain a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 15%.
    • They are required to extend 75% of their Adjusted Net Bank Credit to Priority Sector Lending.
    • SFBs are required to open at least 25% of their total branches in unbanked rural areas.
    • The minimum paid-up voting equity capital for small finance banks shall be Rs.200 crore.
    • SFBs are required to maintain at least 50% of their loan portfolio as microfinance and advances of up to Rs. 25,00,000.
    • SFBs are required to comply with various prudential norms and regulations related to income recognition, asset classification, and provisioning.
    • SFBs are encouraged to adopt technology to improve their operational efficiency and reach the target segments.


Q1) What is Capital to Risk-Weighted Assets Ratio (CRAR)?

Also known as the capital-to-risk weighted assets ratio (CRAR), the ratio compares capital to risk-weighted assets and is watched by regulators to determine a bank's risk of failure. It's used to protect depositors and promote the stability and efficiency of financial systems around the world.

Source: RBI nominee PN Raghunath steps down from Ujjivan SFB board before scheduled term end