How small are Small Finance Banks?

India is home to millions of individuals and small businesses. As a result, it is tough for the government to provide official banking services pan India, and most Indians are denied the advantages of formal banking. To reach communities outside of traditional banking, the government has established the idea of small banks as a way to promote financial inclusion. The purpose is to offer services like bank credit and savings to those who live in remote locations. 

So what objective do such small banks serve?

Small financing banks were created with the intention of bringing the general public inside the basic banking umbrella.

Reaching out to the 90% of micro and small business units that are not currently receiving banking advantages is the primary goal. Catering to the MSME segment together with the agricultural industry and unorganized sector of the economy and providing basic banking services are the causes for the creation of small banks. 

Now the question is who can establish such Small Finance banks?

The organizations who want to launch small financing banks must meet the following requirements in order to be eligible:

  • The promoter must be an Indian resident.
  • The promoter must have at least 10 years of expertise in the banking and financial sector.
  • Local area banks (LAB), microfinance institutions, and non-banking financial institutions may convert their business models into small finance banks.
  • Small financing banks may also change their identities to become urban cooperative banks.

In addition to the aforementioned qualifying requirements, the promoters’ history of loan payback is carefully examined to determine their credit worthiness. The promoters must be able to provide a minimum of five years of spotless performance history.

You would find the following characteristics in small financing banks:

  • ‘Small Finance Bank’ must appear in the bank’s name.
  • Must have 25% of its branches in places without banks.
  • The minimum paid-up capital for a small finance bank is 100 crores of rupees.
  • A three-year lead period is needed before they may grow their branch network.
  • Unable to establish completely owned subsidiaries of non-banking financial institutions.
  • Must maintain their Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio in accordance with Reserve Bank of India rules (SLR).
  • Unable to serve as other banks’ commercial correspondents; however, declare members of their network of business correspondents.
  • May start products like mutual funds, pension plans, and insurance as new revenue streams.
  • Could start selling foreign currency.

It is very evident that small finance banks are the planned means providing establishing banking services in regions where there are no banks. However, the extent of usage of Small Finance Banks is still dicey despite their upsurging significance for financiers and SMEs.

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