A Report on

Small Banks

Prepared by:
Darshan Bhatti
[9200425172]
Nihar Hindocha
[92000425186]
Arpita Soni
[9200425194]
Yashvi Goswami
[9200425199]

Subject:
Banking

Submitted To:
Dr. Monica Verma

Class:
BBA(Hons.) [B]
Sem: 5

MARWADI UNIVERSITY
Rajkot-Morbi Road, At. & Po. Gauridad,
Rajkot-360003, Gujarat, India.
 INDEX

Sr No. Content Page No.

1. Introduction 4

2. History 5

3. Objectives and Features 6

4. Guidelines 7

5.
What are the capital requirements for a small finance bank? 13

6.
Who are authorized dealers? 13

7. Promoters 14

8. List and Branches of Scheduled Small Finance Banks 15

Current Scenario of Small Finance Banks

9. 16

10. Impact of Small Finance Bank on Indian Economy 20

11. Challenges Faced by Small Finance Banks 22

12. Difference between Small Finance Bank and Payment Bank 24

13. Conclusion 26

14. Bibliography 27
 Introduction

Small finance banks are a type of niche banks in India. Banks with a
small finance bank (SFB) license can provide basic banking service of
acceptance of deposits and lending. Small 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 under public limited companies under
the Companies Act 2013. The main significance of small finance banks is to
provide inclusion to underdeveloped areas. These banks provide provisions for
saving vehicles to undeserved or unserved sections of society. These banks
provide financing to the small business units in rural sections.
Banks with a small finance banks license can provide the basic banking
service of acceptance of deposits and lending.
 History

On 17 July 2014, the Reserve Bank of India (RBI) released the draft
guidelines for small finance banks, seeking comments for interested entities and
the general public. The final guidelines were released by RBI on 27 November
2014. Interested parties were required to submit applications before 16 January
2015.
In February 2015, RBI released the list of entities which had applied for a
small finance bank license. There were 72 applicants. It was announced that an
external advisory committee headed by Usha Thorat would evaluate the license
applications.
On 17 September 2015, The Reserve Bank of India (RBI) announced that
it had given provisional licenses to ten entities that would have to convert into
small finance banks within one year. Eight out of these ten entities were
microfinance NBFCs, reiterating RBIs agenda of financial inclusion. Capital
Small Finance Bank was the first small finance bank to begin operations,
opening with 47 branches on 24 April 2016.
On 26 April, 2021, under Section 22 (1) of the Banking Regulation Act,
1949, the RBI has issued an in-principal approval to Uttar Pradesh based
Shivalik Mercantile Co-operative Bank Limited for transition into a small
finance bank. Thus, it has become India's first urban co-operative bank (UCB)
to transition to a Small Finance Bank (SFB).
 Objectives and Features

We might think that why there is need for the introduction of these small
banks and what is its objective. So, answer to that question is here.
The main aim of this bank is to provide the financial services to unserved
and undeserved peoples. The purpose this bank is to strengthen the financial
inclusion by providing banking services like deposits and supply of credit
across the nation. They act as a financial institution that gives financial services
to the unreserved and unbanked places in India.
The objectives of setting up of small finance banks will be for furthering
financial inclusion by,
(i) provision of savings vehicles primarily to unserved and underserved
sections of the population, and
(ii) supply of credit to
small business units;
small and marginal farmers;
micro and small industries; and
other unorganised sector entities, through high technology-low-cost
operations.
We know that Small Finance Banks were established with the objective
of achieving financial inclusion also it focuses on providing credit to the
unorganized sector, micro small and medium enterprises, small and marginal
farmers, and small business units.
 Guidelines

1. Registration, licensing and regulations

The small finance bank shall be registered as a public limited company under
the Companies Act, 2013. It will be licensed under Section 22 of the Banking
Regulation Act, 1949 and 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 RBI and other
regulators from time to time. The small finance banks will be given scheduled
bank status once they commence their operations, and found suitable as per
Section 42 (6) (a) of the Reserve Bank of India Act, 1934.

2. Objectives

The objectives of setting up of small finance banks will be for furthering

financial inclusion by (i) provision of savings vehicles primarily to unserved
and underserved sections of the population, and (ii) supply of credit to small
business units; small and marginal farmers; micro and small industries; and
other unorganised sector entities, through high technology-low-cost operations.

3. Eligible promoters

Resident individuals/professionals with 10 years of experience in banking and

finance; and Companies and Societies owned and controlled by residents will be
eligible as promoters to set up small finance banks. Existing Non-Banking
Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and LABs
that are owned and controlled by residents can also opt for conversion into
small finance banks after complying with all legal and regulatory requirements
of various authorities and if they conform to these guidelines. However, joint
ventures by different promoter groups for the purpose of setting up small
finance banks would not be permitted. As local focus and the ability to serve
smaller customers will be the key criteria in licensing such banks, this may be a
more appropriate vehicle for local players or players who are focussed on
lending to unserved / underserved sections of the society. Accordingly,
proposals from large public sector entities and industrial and business houses,
including from NBFCs promoted by them, will not be entertained.

Promoter / Promoter Groups as defined in the SEBI (Issue of Capital &

Disclosure Requirements) Regulations, 2009 should be ‘fit and proper’ in order
to be eligible to promote small finance banks. RBI would assess the ‘fit and
proper’ status of the applicants on the basis of their past record of sound
credentials and integrity; financial soundness and successful track record of
professional experience or of running their businesses, etc. for at least a period
of five years.

4. Scope of activities

The small finance bank, in furtherance of the objectives for which it is set up,
shall primarily undertake basic banking activities of acceptance of deposits and
lending to unserved and underserved sections including small business units,
small and marginal farmers, micro and small industries and unorganised sector
entities. It can also undertake other non-risk sharing simple financial services
activities, not requiring any commitment of own fund, such as distribution of
mutual fund units, insurance products, pension products, etc. with the prior
approval of the RBI and after complying with the requirements of the sectoral
regulator for such products. The small finance bank can also become a Category
II Authorised Dealer in foreign exchange business for its clients’ requirements.
It cannot set up subsidiaries to undertake non-banking financial services
activities.

The annual branch expansion plans of the small finance banks for the initial five
years would need prior approval of RBI. The annual branch expansion plans
should be in compliance with the requirement of opening at least 25 per cent of
its branches in unbanked rural centres (population up to 9,999 as per the latest
census).
There will not be any restriction in the area of operations of small finance
banks; however, preference will be given to those applicants who in the initial
phase set up the bank in a cluster of under-banked States / districts, such as in
the North-East, East and Central regions of the country. These applicants will
not have any hindrance to expand to other regions in due course. It is expected
that the small finance bank should primarily be responsive to local needs. After
the initial stabilisation period of five years, and after a review, RBI may
liberalize the requirement of prior approval for annual branch expansion plans
and scope of activities of the small finance banks.

The other financial and non-financial services activities of the promoters, if any,
should be kept distinctly ring-fenced and not comingled with the banking
business.

The small finance bank will be required to use the words “Small Finance Bank”
in its name in order to differentiate it from other banks.

5. Capital requirement

The minimum paid-up equity capital for small finance banks shall be Rs. 100
crores. In view of the inherent risk of a small finance bank, it shall be required
to maintain a minimum capital adequacy ratio of 15 per cent of its risk weighted
assets (RWA) on a continuous basis, subject to any higher percentage as may be
prescribed by RBI from time to time. Tier I capital should be at least 7.5 per
cent of RWAs. Tier II capital should be limited to a maximum of 100 per cent
of total Tier I capital. As small finance banks are not expected to deal with
sophisticated products, the capital adequacy ratio will be computed under Basel
Committee’s standardised approaches.

6. Promoter's contribution

The promoter's minimum initial contribution to the paid-up equity capital of

such small finance bank shall at least be 40 per cent. If the initial shareholding
by promoter in the bank is in excess of 40 per cent, it should be brought down to
40 per cent within a period of five years. The promoter's minimum contribution
of 40 per cent of paid-up equity capital shall be locked in for a period of five
years from the date of commencement of business of the bank. Further, the
promoter’s stake should be brought down to 30 per cent of the paid-up equity
capital of the bank within a period of 10 years, and to 26 per cent within 12
years from the date of commencement of business of the bank. Proposals having
diversified shareholding subject to the initial minimum shareholding of
promoters and a time frame for listing of the bank will be preferred. However,
after the small finance bank reaches the net worth of Rs.500 crore, listing will
be mandatory within three years of reaching that net worth. However, small
finance banks having net worth of below Rs.500 crore could also get their
shares listed voluntarily, subject to fulfilment of the requirements of the capital
markets regulator.

7. Foreign shareholding

The foreign shareholding in the small finance bank would be as per the Foreign
Direct Investment (FDI) policy for private sector banks as amended from time
to time. As per the current FDI policy, the aggregate foreign investment in a
private sector bank from all sources will be allowed up to a maximum of 74 per
cent of the paid-up capital of the bank (automatic up to 49 per cent and approval
route beyond 49 per cent to 74 per cent). At all times, at least 26 per cent of the
paid-up capital will have to be held by residents. In the case of Foreign
Institutional Investors (FIIs) / Foreign Portfolio Investors (FPIs), individual FII /
FPI holding is restricted to below 10 per cent of the total paid-up capital,
aggregate limit for all FIIs /FPIs / Qualified Foreign Investors (QFIs) cannot
exceed 24 per cent of the total paid-up capital, which can be raised to 49 per
cent of the total paid-up capital by the bank concerned through a resolution by
its Board of Directors followed by a special resolution to that effect by its
General Body. In the case of NRIs, the individual holding is restricted to 5 per
cent of the total paid-up capital both on repatriation and non-repatriation basis
and aggregate limit cannot exceed 10 per cent of the total paid-up capital both
on repatriation and non-repatriation basis. However, Non-Resident Indian (NRI)
holding can be allowed up to 24 per cent of the total paid-up capital both on
repatriation and non-repatriation basis provided the banking company passes a
special resolution to that effect in the General Body.
 8. Voting rights and transfer/acquisition of shares

As per Section 12 (2) of the Banking Regulation Act, 1949, any shareholder's
voting rights in private sector banks are capped at 10 per cent. This limit can be
raised to 26 per cent in a phased manner by the RBI. Further, as per Section 12B
of the Act ibid, any acquisition of 5 per cent or more of paid-up share capital in
a private sector bank will require prior approval of RBI. This will also apply to
the small finance banks.

9. Prudential norms

The newly set up small finance banks should ensure that they put in place a
robust risk management framework. The small finance bank will be subject to
all prudential norms and regulations of RBI as applicable to existing
commercial banks including requirement of maintenance of CRR and SLR. No
forbearance would be provided for complying with the statutory provisions.

In view of the objective for which small finance bank will be set up, it will be
required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the
sectors eligible for classification as priority sector lending (PSL) by RBI. While
40 per cent of its ANBC should be allocated to different sub-sectors under PSL
as per the extant PSL prescriptions, the bank can allocate the balance 35 per
cent to any one or more sub-sectors under the PSL where it has competitive
advantage.

The maximum loan size and investment limit exposure to a single and group
obligor would be restricted to 10 per cent and 15 per cent of its capital funds,
respectively. Further, in order to ensure that the bank extends loans primarily to
small borrowers, at least 50 per cent of its loan portfolio should constitute loans
and advances of up to Rs.25 lakh.
After the initial stabilisation period of five years, and after a review, RBI may
relax the above exposure limits.

In addition to the restrictions placed on banks’ loans and advances to its

directors and the companies in which its directors are interested under Section
20 of the Banking Regulation Act, 1949, the small finance bank is precluded
from having any exposure to its promoters, major shareholders (who have
shareholding of 10 per cent of paid-up equity shares in the bank), the relatives
[as defined in Section 2 (77) of the Companies Act, 2013 and Rules made there
under] of the promoters as also the entities in which they have significant
influence or control (as defined under Accounting Standards AS 21 and AS 23).
units, insurance products, pension products, etc. with the prior approval of the
RBI and after complying with the requirements of the sectoral regulator for such
products. The small finance bank can also become a Category II and Category I
Authorized Dealer in forex business for its clients’ requirements. However, it
must be noted that such an entity cannot set up subsidiaries to undertake non-
banking financial services activities.

It is mandatory for a small finance bank to use the words “Small Finance
Bank” in its name in order to differentiate it from other banks.
What are the capital requirements for a small finance
bank?

The minimum paid-up equity capital for small finance banks shall be INR 2
billion. For primary (urban) co-operative banks willing to voluntarily transition
into small finance banks, the initial requirement of net worth shall be at INR 1
billion, which will have to be increased to INR 2 billion within five years from
the date of commencement of operations.

Who are authorized dealers?

Authorized dealer refers to any financial institution, which has received

authorization from the RBI to operate as a dealer involved in trading of foreign
currencies.
 Promoters

The promoters shall hold a minimum of 40 per cent of the paid-up voting
equity capital of the bank, which shall be locked-in for a period of five years
from the date of commencement of business of the bank. If the initial
shareholding by promoters in the bank is in excess of 40 per cent of paid-up
voting equity capital, it should be brought down to 40 per cent within a period
of five years. Whether a promoter ceases to be a promoter or could exit from the
bank, after completing the lock-in period of five years, would depend on the
RBI's regulatory and supervisory comfort / discomfort and SEBI regulations in
this regard. Further, the promoters’ stake should be brought down to a
maximum of 30 per cent of the paid-up voting equity capital of the bank within
a period of 10 years, and to a maximum of 15 per cent within 15 years from the
date of commencement of business of the bank.

Further, in the case of such small finance banks which are converted from
UCBs, while the initial lock in period for promoters will be similar to other
small finance banks (i.e. 40 per cent of the paid-up voting equity capital of the
bank for first five years), the requirement of bringing down the promoters’
holding (to 40/30/15 per cent over the period of 5/10/15 years) would
commence from the date of reaching net worth of Rs.200 crore (as against from
date of commencement of business, for other small finance banks).

Proposals having diversified shareholding, subject to the initial minimum

shareholding of promoters, and a time frame for listing of the bank will be
preferred. However, after the small finance bank reaches the net worth of
Rs.500 crore, listing will be mandatory within three years of reaching that net
worth. Small finance banks having net worth of below Rs.500 crore could also
get their shares listed voluntarily, subject to fulfilment of the requirements of
the capital markets regulator. Any proposed material changes in the
shareholding pattern in the promoter entity at the time of application and during
the period between the application and in-principal approval and even thereafter
should be brought to the prior notice of RBI.

List and Branches of Scheduled Small Finance Banks

Sr.N Name of the Bank
o.
1. Au Small Finance Bank Limited

2. Capital Small Finance Bank Limited

3. Equitas Small Finance Bank Limited

4. Suryoday Small Finance Bank Limited

5. Ujjivan Small Finance Bank Limited

6. Utkarsh Small Finance Bank Limited

7. ESAF Small Finance Bank Limited

8. Fincare Small Finance Bank Limited

9. Jana Small Finance Bank Limited

10. North East Small Finance Bank Limited

11. Shivalik Small Finance Bank Limited

12. Unity Small Finance Bank Limited

 Current Scenario of Small Finance Banks

 Deposits of small finance banks rise over last year

Deposits of many small finance banks (SFBs) have risen compared to the
previous year as customers increased savings in the banks, which provide
services to underserved sections of society.
Data released by the Indian Banks Association (IBA) showed that deposits of
major SFBs have increased in 2022 compared to a fall or minimal rise last year.
Deposits of AU Small Finance Bank rose to Rs 52,585 crore in 2022 from Rs
35,979 crore in 2021 and Rs 26,164 crore in 2020.
Deposits of ESAF Small Finance Bank rose to Rs 12,815 crore in 2022 from Rs
8,999 crore in 2021 and Rs 7,028 crore in 2020. Ujjivan Small Finance Bank’s
deposits rose to Rs 18,292 crore in 2022 from Rs 13,136 crore in 2021 and Rs
10,780 crore in 2020. Utkarsh Small Finance Bank’s deposits rose to Rs 10,074
crore in 2022 from Rs 7,508 crore in 2021 and Rs 5,235 crore in 2020.
Experts said branch expansion and higher interest rates paid by SFBs on
deposits have been the key factors among driving customers to deposit more
money in them.
“We have built a deposit base of more than Rs.58,000 crore in the last five-and-
a-half years with steadily improving granularity. It has been made possible due
to our approach of building a predictable, scalable and replicable deposit
franchise,” said Uttam Tibrewal, Executive Director, AU Small Finance Bank.
Small finance banks are on a high-growth trajectory compared to commercial
banks as they are working on a combination model wherein, they offer higher
interest rates alongside diversifying services, said Krishnan Sitharaman, senior
director at CRISIL Ratings.
  More branches, more deposits
A report based on the Reserve Bank of India (RBI) data noted that SFBs
expanded their branches exponentially between 2016 and 2021.
“Over the five years from 2016 to 2021, SFB branches increased from 415 to
5,107 branches which amounted to a compound annual growth rate (CAGR) of
87.30 percent,” the report noted.
The authors of the report also compared the area-wise expansion of SFBs which
showed emerging interest in them among people in semi-urban and rural areas
compared to urban areas.
“In the year 2016-17, the proportion of SFB branches in metropolitan and urban
areas together was 48 percent, which was reduced to 44 percent in 2020-21.
Likewise, the proportion of SFB branches in semi-urban and rural areas
increased from 52 percent to 56 percent over the same period,” the report said.
Archana Fulwari, assistant professor in the business economics department at
Maharaja Sayajirao University and one of the authors of the report, explained
the branch expansion by SFBs.
“One factor to look into rising branch expansion is that SFBs are a relatively
new concept as they were set up only from 2015-16 onwards. So, branch
expansion is a natural course of action,” she said.
“Another reason is that the incumbents in the sector are performing well in
terms of return on assets. This is bound to attract more players and further
increase the number of branches,” Fulwari said.
Sitharaman added that small finance banks are offering their customers a
flexible banking experience with higher demand; so geographically, they can
scale up quickly.
“With the new provisions and credit course to work on cleaning their books
from the peak COVID period when they incurred bad loans, SFBs are able to
open new branches,” he said.
  Competitive products and deposit rates
Tibrewal said that raising low-cost but stable retail deposits and innovative
product solutions like monthly interest payout, no deposit slips and Quick
Response code solutions had been received well in the market.
“The core focus is on maintaining a stable CASA ratio while building a
comprehensive suite of products, services & digital solutions with high
customer engagement,” he added.
CASA is short for current accounts and savings accounts.
To attract retail depositors, many SFBs raised interest rates on fixed deposits
(FD). Ujjivan Small Finance Bank offered an 8 percent interest rate on its 560-
day deposits for regular customers and 8.75 percent for senior citizens. Jana
Small Finance bank in its various schemes offered up to 8.5 percent interest on
FDs to senior citizens and 7.75-8.35 percent to regular depositors.
“The hike in rates is in line with the bank’s retail strategy of building granular
deposits and the evolving macro-economic situation,” Ittira Davis, Managing
Director and Chief Executive Officer, Ujjivan SFB, said in a statement.
“Competitive and customer-friendly interest rates on savings accounts and
deposits have always helped us get customer attention,” Tibrewal said.
Sitharaman explained how SFBs offer some of the highest interest rates.
“Majorly, these banks lend loans to micro, small and medium enterprises
(MSME), housing, and medical sector borrowers and charge them higher
interest rates as they have the borrowing power. These high lending interest
rates on loans are balanced with high-interest rates on deposits,” he said.
The scenario during and post-COVID was of great volatility and low economic
activity, Fulwari said.
“This saw a lot of funds in the stock market and in mutual funds failing
miserably. Whereas on the other side, SFBs attracted retail depositors in these
uncertainties by offering higher interest rates compared to other banks,” Fulwari
explained.
Besides interest rates on FDs, many SFBs also offer attractive interest rates on
savings accounts. AU Small Finance Bank provides savings account interest
rates of up to 7 percent. Equitas Small Finance Bank and Ujjivan Small Finance
Bank offer interest rates of between 3.5 percent and 7 percent.
“Looking at the bigger picture, it would be unlikely that SFBs could become
major influencers in the banking sector because, in terms of percentage, they are
minuscule compared to major market-holding commercial banks,” Fulwari said.
 Impact of Small Finance Bank on Indian Economy

The financial and economic conditions of India are superior then other
country in the world. Credit, market and liquidity risk studies suggest that
Indian banks are generally flexible and have withstood the global changes well.
Banks are expected to play an important role in Indian economy. Indian banking
industry has recently witnessed the roll out of innovative banking models like
payment banks and small finance banks. The basic objective for the setting up
of SFBs are provide credit facilities to small business units, small farmers,
micro and small industries and unorganized sectors and also to improve
financial inclusion in the country.
Small Finance Banks are providing financial services at low transaction
cost. It is very difficult for commercial banks to open branches in every village
so by mobile phones SFBs provide low-cost platform for banking services to
every citizen. SFBs provide higher interest rate on deposits and giving credit at
lower rates. This will benefit the lower income group and small business. For
customers, the real attraction will be convenience of carrying out banking
transaction very easily. SFBs also provide benefit to government by reducing
black money from financial system. It will encourage people for use of E-
money. These banks are providing financial literacy to rural citizens specially
women. SFBs will reduce dependency on cash so cashless economy will be
opted.
According to RBI estimates 90% of small businesses do not have access
to financial institutions. Commercial banks mainly fund large and medium
industries or give loans for home, education or vehicle purposes. But it is very
difficult small enterprises to get working capital funding. Small financial banks
can solve these kinds of problems. RBI expects them to be high technology and
low-cost operators, which also bring new innovations in the banking industry.
But SFBs affected commercial banks because of shift of savings accounts
money also reduces regular fee income like- cash transfer, cheques withdrawals,
fee for making demand drafts or ATM transactions. SFBs will have to invest
75% of their deposits in government sector and it can reduce statutory liquidity
ratio. The new banks are going to trust on new technology and this will go down
their costs, make their services efficient and stop fraud chances. SFBs will not
affect industrial and corporate sector but it will affect the retail business of
existing banks. New banks will target the group of low income of rural areas.
So, there is a competition between rural banks and SFBs.
 Challenges Faced by Small Finance Banks

As we know that Small Finance Banks are playing a significant role for improve
the financial inclusion. These banks have many advantages like promote the
lending to small borrowers, help to understand the needs of unbanked areas.
SFBs have low operational expenses. Apart of these benefits small finance
banks are facing some challenges in terms of building the required capacity,
infrastructure to service to different clients and also to train its existing
manpower. Because of the local nature of business, Small Finance Banks have
higher risks, so care has been taken to license only experienced players in the
field. It is observed that the banks that have done well in the past were those
promoted by financial institutions. These successful banks had adequate
experience in the financial services field, financial resources, a sound business
model, and were well equipped in every way to run a bank.
A minimum Capital Adequacy Ratio of 15 per cent is to be maintained by
the banks on a continuous basis. This Capital Adequacy Ratio requirement is
higher than the 9 per cent requirement for scheduled commercial banks as well
as 13 per cent for the new Universal Bank licenses. This clearly indicates that a
Small Finance Bank is perceived riskier as compared to the Universal Bank due
to its local nature of business. SFBs are also facing the lack of awareness along
with inadequate funding. SFBs are geographically concentrated. So, they have
to face systemic risk like weather, crop prices and regional economic
performance as compared to other banks. This could lead to governance
problems. These banks have to pay higher rate to their depositors. It might
create the need to make riskier loans and it might be raising nonperforming
assets.
The initial challenge for the SFBs banks will be to adjust their promoter’s
contribution and foreign shareholding to follow with the RBI guidelines. Many
of the institutions have foreign shareholding as high as 90 per cent, and so they
will need to dilute this to 49 per cent. The next challenge would be to offer
multiple banking products. It would be a high-cost affair for developing a
technologically sound system for low-cost products. It requires large capital to
build automated teller machine (ATM), automated banking machine (ABM) or
automated branch network and this will make the delivery of banking services
costly. The institutional transformation will also require the induction of new
and diversified talent from the banking sector as well as training the existing
staff to accustom them to this new system of delivering services.
 Difference between Small Finance Bank and Payment
Bank

Despite numerous Difference Between Small Finance Bank and Payment

Bank, it has to be noted that both these types of financial institutions have to
abide by the rules and regulations laid down by the Reserve Bank of India. The
major Difference Between Small Finance Bank and Payment Bank is that a
small finance bank provides financial services to the unserved and unbanked
areas, whereas a payment bank operates without involving any credit risk on a
smaller scale.
Both the Small Finance Bank and Payment Bank are licensed by the Reserve
Bank of India. The functioning and the guidelines of both these banks are
monitored by the central bank of the country. Let's discuss more the key
Difference Between Small Finance Bank and Payment Bank in this article.

Small Finance Bank vs Payments Bank

Parameters Small Finance Banks Payments Banks
Definition The RBI has developed small Financial Banks to A Payments bank is akin to a
provide basic banking facilities to the country's regular bank but operates on a
underserved and unprivileged areas much smaller scale
They are not allowed to provide
any credit assistance to their
customer's

Objectives Set up to offer financial inclusions by providing The primary objective of having
credit facilities and loans to small businesses a payments bank is the provision
operating from underprivileged areas, marginal of financial inclusion by -
and small farmers, small and micro industries, and
→providing small savings
other businesses operating specifically in the
accounts
unorganized sectors
→remittance of payments
services to migrant laborers,
low-income groups, small
businesses, and other businesses
operating in the unorganized
sectors
Number of As recorded in December 2021, there are 11 small India has 6 payments banks as of
banks finance banks in India. They are - December 2021. They are -
→Capital Small Finance Bank Ltd →Airtel Payments Bank Ltd
→Au Small Finance Bank Ltd →India Post Payments Bank Ltd
→Fincare Small Finance Bank Ltd →Fino Payments Bank Ltd
→Equitas Small Finance Bank Ltd →Paytm Payments Bank Ltd
→ESAF Small Finance Bank Ltd →Jio Payments Bank Ltd
→Suryoday Small Finance Bank Ltd →NSDL Payments Bank
Limited
→Ujjivan Small Finance Bank Ltd
→Utkarsh Small Finance Bank Ltd
→North East Small Finance Bank Ltd
→Jana Small Finance Bank Ltd
→Shivalik Small Finance Bank Ltd
Minimum The minimum equity capital paid up for small The minimum equity capital
Capital finance banks is Rs 100 crores paid up for the payments bank is
Required Rs 100 crores

Scope Provide financial banking assistance only in the The payment banks can provide
country's marginalized and underserved areas financial assistance in the form
of ATM/debit cards and mobile
banking
Credit cards cannot be issued by
them
Time Deposit Recurring and Fixed Deposits are accepted by the Time deposits are not accepted
Small Finance Banks by these banks

Loans They can offer small loans They are not eligible to offer any
loan
Restrictions They are like normal banks operating in They are not eligible to set up
underprivileged areas subsidiaries for undertaking
services related to non-banking
No financial restrictions are imposed on their
financial activities
functioning

First Launched India's first small finance bank was Capital Small India's first payments bank was
Finance Bank, which was launched in 2016 Airtel Payments Bank, which
was also launched in 2016
 Conclusion

Small Finance Bank will mark biggest revolution after the nationalization of
banks in the Indian banking Industry. It will make banking more competitive
and more inclusive for both borrowers and depositors. It will make banking
more affordable to the common citizens. So we can say “The new era of
consumers has finally started”. Small Finance Banks aims to provide basic
banking and financial services to unbanked and disadvantaged section of the
population. They should focus on establishing more bank branches in rural
areas. Because of Small Finance Banks now the people in rural areas can easily
avail the basic facilities such as loans, deposits and online banking. Small
Finance Bank plays a crucial role to provide assistance for under and unserved
faction in order to enhance their socio-economic environment. Small Finance
Bank will be having a vital role in economic development and will provide a
huge support to the Indian banking sectors.
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