Small Finance Bank
Also written SFB
A category of bank introduced by the RBI that takes small deposits and gives small loans, mainly to people and small businesses the banking system does not reach well.
In plain language
A Small Finance Bank is a bank built for small amounts and small borrowers.
It does two things a household needs: it takes small deposits and it gives small loans. Its focus is on people who have been unserved or underserved by banks: small and marginal farmers, micro and small enterprises, small business units and people working in the unorganised sector.
Think of a vegetable seller who needs Rs 30,000 to buy a handcart, or a small farmer who needs money before sowing. A large bank may not find these loans worth the effort. A Small Finance Bank exists to make them.
The booklet lists it as one of the new categories of banks that the Reserve Bank of India has introduced.
How it works
Key features (Chapter 4, "New Categories of Banks and Business Correspondents"):
- Provides features like taking small deposits and disbursing small amount loans.
- An instrument to save funds primarily for unserved and underserved sections of the population.
- Extends loans of small amount to small business units, micro and small enterprises, small and marginal farmers and entities in the unorganised sectors.
How it compares with the other items in the same RBI table:
| Small Finance Bank | Payment Bank | Business Correspondent | |
|---|---|---|---|
| What it is | A bank | A bank | A representative of a bank |
| Takes deposits | Yes, small deposits | Demand deposits only; no fixed or recurring deposits | Collects deposits for its bank |
| Gives loans | Yes, small loans | No loans or advances | Disburses small value credit for its bank |
| Cards | (not stated in the booklet) | ATM and debit cards, no credit cards | (not applicable) |
Who regulates it. The RBI, which the booklet describes as the regulator and supervisor of the overall banking system. Complaints about banking products go through the banking grievance channels in Chapter 12, not SEBI.
A worked example
Names and amounts are illustrative.
Savitri runs a small tiffin service in Nagpur and earns about Rs 18,000 a month. She wants to buy a larger cooking range and utensils costing Rs 45,000.
Step 1: where to go. Her payment bank account, which she uses to receive customer payments, cannot give loans. So she approaches a Small Finance Bank, whose job is precisely to lend small amounts to small business units like hers.
Step 2: the loan. She borrows Rs 45,000, to be repaid in 18 monthly instalments of Rs 2,800 (an illustrative EMI including interest).
Total repaid = 2,800 × 18 = Rs 50,400
Cost of borrowing = 50,400 − 45,000 = Rs 5,400
Step 3: saving. Her new equipment lets her take more orders, and her income rises to Rs 24,000 a month. She starts putting Rs 1,500 a month into a small deposit at the same bank.
The Small Finance Bank has played both of its roles: it took her small deposits and gave her a small loan.
Why NISM asks about it
Chapter 4 (Savings Related Products) has one table of new categories introduced by the RBI: Payment Bank, Small Finance Bank and Business Correspondent. Expect a matching question: which one can give small loans to small and marginal farmers and micro enterprises? (Small Finance Bank) and which one cannot give loans at all? (Payment Bank).
Common exam traps
- A Small Finance Bank can lend; a Payment Bank cannot. This is the most tested difference.
- It both takes small deposits and gives small loans.
- Its target is the unserved and underserved: small business units, micro and small enterprises, small and marginal farmers, the unorganised sector.
- It was introduced by the RBI, not SEBI.
- A Business Correspondent is not a bank. It is a representative who works on behalf of one.
Where this is taught
- Series SEBI-ICE · Chapter 4: Savings Related Productsintroduced here
- Series X-A · Chapter 5: Introduction to Indian Financial Marketsintroduced here
Related terms
- Business CorrespondentA representative of a bank, also called a Bank Mitra, who goes to customers in remote places and villages to open accounts, take deposits, transfer funds and give small loans.
- Credit scoreThe number a credit information company builds from your loan and credit-card repayment history, and the first thing a lender looks at when your application arrives.
- Payment BankA new category of bank that offers savings and current accounts, debit cards and remittances, but cannot give loans, issue credit cards, or accept fixed or recurring deposits.
- Pradhan Mantri Jan Dhan YojanaThe Government's financial inclusion scheme launched in August 2014: a zero-balance bank account with a RuPay debit card, insurance cover, an overdraft facility and direct benefit transfers.
- Reserve Bank of IndiaIndia's central bank, set up on April 1, 1935 under the RBI Act. It runs monetary policy, regulates and supervises banks and NBFCs, is banker to the Government and lender of last resort.
- Commercial bankA regulated deposit-taking institution supervised by the Reserve Bank of India, inspected and audited at intervals, offering savings, current, fixed and recurring deposit accounts.