Small finance banks are a type of bank that helps those sections which do not get support from other banks. Small finance banks provide basic bank facilities to the economical sections which are not supported by the other banks. It helps to provide financial aid to the small business units, small or marginal farmers, micro or small industries. It includes small scale businesses, the unorganized sector, low-income households, farmers, etc.
Small finance banks are registered as a public limited company under companies act in 2013. It is licensed under section 22 of the banking regulation act 1949. It is governed by the provisions of the banking regulation act 1949 and the reserve bank of India act 1934. Reserve bank of India wants to help the weaker sections of the economy ie rural and semi-urban areas.
Small finance banks let their depositors invest in current accounts and savings accounts, fixed deposits, commercial papers, refinancing, etc. On saving accounts they offer a 6-7% interest rate. on fixed accounts, they offer a 9% interest rate and so on.
Small finance banks provide two types of loans that are individual and group loans. The group loans are offered on joint liability. If a member of the group fails to pay the amount then the whole group is liable for the loan.
Small finance groups require prior approval every time from the RBI when they want to establish a new branch. Small Finance Banks also require to extend 75% of their Adjusted Net Bank Credit (ANBC) to the classified sectors under the priority sector lending (PSL) by the RBI.
The objective of small finance banks
- Its main and foremost purpose is to provide an institutional mechanism for promoting savings among the rural & semi-urban sections of society.
- It helps in the supply of credit to small business units; small & marginal farmers; micro & small industries and other unorganized sectors.
Rules for Small Finance banks
- Small finance banks will perform basic banking services of accepting the deposits and lending money to backward sections.
- It will provide banking facilities to boost saving habits among rural people.
- These small finance banks are established as a public limited company. They may be promoted either by individuals, corporate, trust or societies.
- These are governed by the provisions of the Reserve Bank of India act 1934 and the Banking Regulation Act 1949.
- Small Finance Banks cannot borrow funds from the Reserve Bank of India, unlike any other scheduled bank.
Key challenges faced by Small Finance Bank
- It is difficult to maintain an ideal technology platform which will be beneficial for both the customers in ease of transactions and to the bank as a reduction in cost.
- Earlier Small Finance Banks were functioning as MFIs (Microfinance institutions), Small financial Banks did not handle deposits before.
- It is essential for them to invest in the infrastructure which enables deposits through ATM network and partnering with banks.
- Capital adequacy ratio, cash reserve ratio (CRR) and statutory liquidity ratio (SLR) will be an aspect for managing. Which will result in reduced earnings until SFBs develop a substantial depositor base for managing them.
Eligibility Criteria for Banks
- Min. Paid Up Capital Rs. 100 Crores
- Promoters minimum initial contribution to above 40%(to be bought to 26% within 12 years of commencement)
- Foreign Shareholding as per FDI policy for private banks
- Subjected to all prudential norms and regulations of commercial banks
- Extend 75% of ANBC to the sectors classified as PSL
- At least 50% of its loan portfolio should constitute of loan and advances up to 25 lakhs
Q1-Why Small Finance Banks are needed?
Small finance banks can play an important role in the supply of credit to micro and small enterprises, agriculture and banking services in unbanked and under-banked regions in the country. Therefore RBI decided to license new “small finance banks” in the private sector.
Q2-Are payments banks scheduled banks?
Payments banks is a new model of banks conceptualized by the Reserve Bank of India (RBI). These banks can accept a restricted deposit, which is currently limited to ₹100,000 per customer and may be increased further. These banks cannot issue loans and credit cards
Q3-What is the difference between small finance banks and commercial banks?
These banks can do almost everything that a normal commercial bank can do but at a much smaller scale. One such difference is that a payment bank has a limit of 1 lakh on deposit per account; small finance banks do not have a limit. Payments banks cannot lend, while small finance banks can give loans.
Q4-How many private banks are there in India?
In all, there are 21 private sector banks in India. Out of which there are 13 old private sector banks that were present even before nationalization 1969 and are still autonomous and private which are, Catholic Syrian Bank, City Union Bank, etc.
Q5-Is Jana bank small finance bank listed?
Jana Small Finance Bank, formerly Janalakshmi Financial Services, is looking at listing its shares by March 2021. It started operations on March 28. As a microfinance institution, Bengaluru-based Janalakshmi raised Rs 16 billion as capital in 2017-18.
Thus we can say that small finance banks help those sections which do not get support from other banks. Small finance banks provide basic bank facilities to the economical sections which are not supported by the other banks. They are important for the development of the weaker sections as they provide the much needed financial help to them.
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