Small Finance Bank

Subject – Economy

Context – Small finance banks are meeting inclusion objectives, and must stick to their differentiated model.

Concept –

Small Finance Banks are the financial institutions which provide financial services to the unserved and unbanked region of the country.
They are registered as a public limited company under the Companies Act, 2013.
Small Finance Banks are governed by the provisions of the:
- Banking Regulation Act, 1949;
- Reserve Bank of India Act, 1934;
- Foreign Exchange Management Act, 1999;
- Payment and Settlement Systems Act, 2007;
- Credit Information Companies (Regulation) Act, 2005;
- Deposit Insurance and Credit Guarantee Corporation Act, 1961;
- Other relevant Statutes and the Directives, Prudential Regulations and other Guidelines/Instructions issued by Reserve Bank of India (RBI) and other regulators from time to time.
SFBs will be given scheduled bank status once they commence their operations, and found suitable as per Section 42 of the Reserve Bank of India Act, 1934.

Differentiated Banks vs Universal Banks

There are two kinds of banking licences that are granted by the Reserve Bank of India – Universal Bank Licence and Differentiated Bank Licence.
Differentiated Banks (niche banks) are banks that serve the needs of a certain demographic segment of the population. Small Finance Banks and Payment Banks are examples of differentiated banks in India.
Differentiated banks are distinct from Universal Banks (Eg: Commercial Banks like SBI, HDFC, ICICI etc) as they are infused as niche segments. Niche banks typically target a specific market and tailor the bank’s operations to this target market’s preferences.
The differentiation could be on account of capital requirement, the scope of activities or area of operations. As such, they offer a limited range of services/products or function under a different regulatory dispensation.