Small Finance Banks in India: Complete Guide to SFBs

Introduction: Banking for the Unbanked

Kamla Devi runs a small kirana store in a dusty town in Rajasthan. For years, big banks wouldn’t give her a loan—she had no collateral, no credit history, and her shop’s earnings were too small for their attention. Then AU Small Finance Bank opened a branch nearby. Today, she has a savings account, a small business loan, and even a RuPay debit card. Her world has expanded.

This is the story of Small Finance Banks (SFBs)—a new category of banks created specifically to serve the unserved and underserved. They’re small by design but mighty in their impact on financial inclusion.

What Are Small Finance Banks?

Definition

Small Finance Banks are a category of niche banks introduced by RBI in 2015 to provide:

• Basic banking services (deposits, lending)
• To unserved and underserved sections
• Including small businesses, farmers, micro and small industries, and the unorganized sector

Key Mandate

Primary Objectives:

• Financial inclusion
• Banking services to small businesses
• Serving low-income groups
• Reaching underbanked areas

Regulatory Requirements:

• 75% of loans must be to Priority Sector (vs 40% for other banks)
• 50% of loans must be ≤₹25 lakhs
• No large corporate lending
• Focus on small-ticket loans

History: From MFIs to Banks

Background

Before 2015, microfinance institutions (MFIs) and small NBFCs served low-income segments but couldn’t offer deposit services—limiting their ability to provide complete banking solutions.

Nachiket Mor Committee (2013)

Recommended creating differentiated banks:

• Small Finance Banks for inclusion
• Payments Banks for transactions

RBI Guidelines (2014)

In November 2014, RBI released guidelines for SFB licensing:

Key Requirements:

First Licenses (2015)

RBI received 72 applications and granted “in-principle” approval to 10 entities:

The Original 10:

1. AU Financiers (India)
2. Capital Local Area Bank
3. Disha Microfin
4. Equitas Holdings
5. ESAF Microfinance
6. Janalakshmi Financial Services
7. RGVN (NE) Microfinance
8. Suryoday Micro Finance
9. Ujjivan Financial Services
10. Utkarsh Micro Finance

Subsequent Licenses

• Fincare SFB: 2017
• North East SFB: 2017 (converted from RGVN)
• Shivalik SFB: 2021 (converted from UCB)

Small Finance Banks in India Today

Overview of Major SFBs

AU Small Finance Bank: The Leader

Profile:

• Founded: 1996 (as AU Financiers)
• Bank License: 2017
• Headquarters: Jaipur
• Branches: 1,000+
• AUM: ₹80,000+ crores

Key Highlights:

• Largest SFB by size
• Profitable since inception
• Strong vehicle finance legacy
• Expanding into full-service banking
• Listed on stock exchanges

Products:

• Savings accounts (competitive rates)
• Fixed deposits
• Vehicle loans (cars, two-wheelers, tractors)
• MSME loans
• Home loans
• Credit cards (launched recently)
• Insurance distribution

Equitas Small Finance Bank

Profile:

• Founded: 2007 (Equitas Development)
• Bank License: 2016
• Headquarters: Chennai
• Branches: 900+

Key Highlights:

• Strong used vehicle financing
• Tamil Nadu dominant presence
• Focus on small business
• Steady profitability

Strength:

• Used commercial vehicle expertise
• Deep South India network
• Digital banking focus

Ujjivan Small Finance Bank

Profile:

• Founded: 2005 (Ujjivan Financial Services)
• Bank License: 2017
• Headquarters: Bengaluru
• Branches: 600+

Key Highlights:

• Microfinance-focused
• Women borrowers majority
• Rural and semi-urban focus
• IPO in 2019

Products:

• Group loans (microfinance)
• Individual loans
• Savings products
• Insurance

Jana Small Finance Bank

Profile:

• Founded: 2006 (Janalakshmi)
• Bank License: 2018
• Headquarters: Bengaluru

Key Highlights:

• Largest MFI conversion
• Urban microfinance focus
• Affordable housing loans
• Experienced management

How SFBs Work

Business Model

Target Customers:
    │
    ├── Low-income households
    ├── Small/marginal farmers
    ├── Micro enterprises
    ├── Unorganized sector workers
    └── Self-employed individuals
        │
        ↓
Products Offered:
    │
    ├── Microloans (₹10,000 - ₹5 lakhs)
    ├── Small business loans
    ├── Vehicle finance
    ├── Affordable housing
    ├── Savings accounts
    ├── Fixed deposits
    └── Basic banking services

Revenue Model

Interest Income:

• Higher yields on small loans (18-24%)
• Lower cost of deposits than MFI funding
• Net interest margin: 6-8%

Fee Income:

• Processing fees
• Insurance commissions
• Account charges

Cost Structure

High Costs:

• Branch network in remote areas
• Staff for field collection
• Customer acquisition costs

Operating Efficiency:

• Technology reducing costs
• Group lending efficiencies
• Cross-selling improving unit economics

Services Offered by SFBs

Deposit Products

Savings Accounts:

• Competitive interest rates (4-7%)
• Zero/low minimum balance options
• Basic accounts for inclusion

Fixed Deposits:

Rates often higher than large banks

Recurring Deposits:

• Suitable for small savers
• Monthly commitment options
• Similar rates to FDs

Lending Products

Microfinance Loans:

• Group loans (JLG model)
• ₹10,000 to ₹1 lakh
• Weekly/monthly repayment
• For women entrepreneurs

Small Business Loans:

• ₹1 lakh to ₹25 lakhs
• Working capital and term loans
• Simpler documentation
• Faster approval

Vehicle Finance:

• Two-wheelers
• Used cars
• Commercial vehicles
• Tractors

Home Loans:

• Affordable housing focus
• Smaller ticket sizes
• Self-construction loans
• Home improvement

Personal Loans:

• For existing customers
• Salary-backed loans
• Emergency needs

Other Services

Payment Services:

• UPI
• Debit cards (RuPay)
• Mobile banking
• Bill payments
• Money transfers

Insurance:

• Life insurance
• Health insurance
• Micro-insurance products

Mutual Funds:

• Basic MF distribution
• SIP facilitation

Regulations for SFBs

Key Requirements

Promoter Holding

Timeline for Dilution:

Restrictions

Cannot Do:

• Lending to large corporates
• Complex derivative trading
• Lending to promoter group beyond limits
• Cross-border business (with exceptions)

RBI Supervision

• Same supervision as scheduled banks
• Regular inspections
• Capital adequacy monitoring
• Asset quality review

SFBs vs Other Banks: Comparison

Financial Inclusion Impact

Reach Statistics

SFBs Collectively:

• 5,000+ branches
• 15+ million customers
• ₹2+ lakh crore deposits
• ₹2+ lakh crore loans

Success Stories

Women Empowerment:

• 70%+ of microfinance borrowers are women
• First-time bank account holders
• Financial independence enablement

Rural Banking:

• Presence in 6,000+ unbanked villages
• Jan Dhan account opening
• DBT disbursement

MSME Financing:

• Serving smallest businesses
• No collateral requirements often
• Fast turnaround

Challenges Addressed

Before SFBs:

• High-interest moneylenders
• No savings facility for small amounts
• No insurance access
• No formal credit history

After SFBs:

• Regulated lending rates
• Complete banking services
• Insurance products
• Credit bureau reporting

Challenges Facing SFBs

Asset Quality

Microfinance Risks:

• Higher delinquency in economic stress
• Natural disasters impact
• Political interference (loan waivers)

COVID Impact:

• Microfinance collections disrupted
• Asset quality deteriorated
• Recovery ongoing

Profitability Pressure

Issues:

• High operating costs
• Investments in technology
• Competition from fintech
• Margin compression

Regulatory Burden

Challenges:

• Capital requirements
• Branch opening mandates
• Compliance costs
• Reporting requirements

Competition

From:

• Large banks entering small loans
• NBFCs in vehicle finance
• Fintechs in digital lending
• MFIs (non-bank)

Funding Costs

Issues:

• Building deposit franchise takes time
• Wholesale funding still needed
• Cost disadvantage vs large banks

Investing in SFBs

Listed SFBs

Investment Considerations

Positives:

• Growth opportunity in underserved segments
• High NIMs (Net Interest Margins)
• Financial inclusion tailwinds
• Government push for inclusion

Risks:

• Asset quality sensitivity
• Regulatory changes
• Competition
• Execution challenges

Valuation Metrics

Future of Small Finance Banks

Growth Trajectory

Expected Trends:

Loan Growth: 20-25% CAGR
Deposit Growth: 25-30% CAGR
Branch Expansion: 15-20% annually
Digital Banking: Accelerating

Evolution Path

Current State:

• Niche inclusion-focused banks
• Microfinance legacy
• Building retail franchise

Future State:

• Full-service regional banks
• Technology-driven operations
• Diversified loan books
• Competitive with universal banks

Universal Bank Transition

RBI Pathway:

• SFBs can apply for universal bank license after 5 years
• Must meet requirements (track record, capital, etc.)
• AU SFB has expressed interest

Mergers and Consolidation

Possible:

• Merger between SFBs
• Acquisition by large banks
• NBFC acquisitions by SFBs

Choosing an SFB for Banking

For Savings/FD

Consider:

• Interest rates (often higher)
• Branch accessibility
• Digital banking quality
• Deposit insurance (covered under DICGC)

Best For:

• Higher FD rates
• Basic savings needs
• Rural/semi-urban customers

For Loans

Best For:

Safety Check

All SFBs:

• RBI regulated
• DICGC insured (₹5 lakhs)
• Same safety as commercial banks
• Regular RBI supervision

Key Takeaways

1. Created for inclusion – SFBs serve unserved segments
2. 75% PSL mandate – Most loans to priority sector
3. MFI origins – Most converted from microfinance institutions
4. Higher rates – Better deposit rates, higher loan rates
5. Growing fast – Building deposit and loan books
6. RBI regulated – Same supervision as commercial banks
7. Deposits insured – DICGC coverage up to ₹5 lakhs

Disclaimer

This article is for educational purposes only. SFB products and rates change frequently. Compare current offerings before making banking decisions. This is not investment or banking advice.

Frequently Asked Questions

Q: Are SFB deposits safe? A: Yes, SFB deposits are covered under DICGC insurance up to ₹5 lakhs, same as other banks.

Q: Can SFBs issue credit cards? A: Yes, some SFBs like AU have started issuing credit cards.

Q: Why are SFB FD rates higher? A: SFBs need to attract deposits to build their franchise and compete with established banks.

Q: Can I get a large business loan from SFB? A: SFBs focus on smaller loans. For large corporate loans, approach universal banks.

Q: Will SFBs become large banks? A: Some may apply for universal bank licenses. AU SFB is a potential candidate.

Q: What happens if an SFB fails? A: RBI supervises closely and can merge weak banks. Deposits up to ₹5 lakhs are insured.

Small Finance Banks prove that “small” can mean “significant”—significant impact on millions of lives previously ignored by mainstream banking. They’re not just banks; they’re agents of financial empowerment.