What is Small Finance Bank? Are They Safe?

India is a big country with a population of more than 130 crores. As per the Niti Ayog Report, 69% of the population is living in rural areas. They do not have access to the banking facility. To overcome this issue, the Reserve Bank of India has introduced the Small Finance Bank to cover these people under the banking system.

Looking at the huge population which are uncover under the banking system, the small finance banks can play very pivotal role in the supply of credit to small enterprises. There are certain norms which these small finance banks needs to comply. We will discuss them later in this article.

What is Small Finance Bank?

Small Finance Banks are Banks licensed by RBI under section 22 of the Banking Regulation Act, 1949. Banks with small finance bank license can provide the basic banking services like accepting of deposits and lending money. The main targeted audience of these banks is small business units, farmers, small industries and unorganized sectors.

Objective of Small Finance Bank

Below are the objectives of these banks:

  • Provision of savings vehicles to unserved sections of the population
  • Providing credit to small business units, farmers, small industries at low cost.
  • Promote financial inclusion

These banks open their branches where they have an existing customer base, as many of these banks are earlier microfinance institutions.

In 2015, the RBI has invited institutions for small finance bank’s license. There was a total of 72 applications received. out of them, RBI has approved 10 licenses for the small finance bank. Below is the list of these 10 small finance banks in India.

Original licensee/promoterCommencedBank nameHeadquarters
Ujjivan Financial Services Pvt Ltd1 February 2017Ujjivan Small Finance BankBangalore
Janalakshmi Financial Services Pvt Ltd29 March 2018Jana Small Finance BankBangalore
Equitas Holdings Pvt Ltd5 September 2016Equitas Small Finance BankChennai
Au Financiers India Ltd19 April 2017AU Small Finance BankJaipur
Capital Local Area Bank Ltd24 April 2016Capital Small Finance BankJalandhar
Disha Microfin Pvt Ltd21 July 2017Fincare Small Finance BankBangalore
ESAF Microfinance17 March 2017ESAF Small Finance BankReg: Chennai, Corp: Thrissur
RGVN North East Microfinance Ltd17 October 2017North East Small Finance BankGuwahati
Suryoday Microfinance Pvt Ltd23 January 2017Suryoday Small Finance BankNavi Mumbai
Utkarsh Microfinance Pvt Ltd23 January 2017Utkarsh Small Finance BankVaranasi

Scope of Activities

  • They can provide basic banking services like deposits and lending
  • Sell financial product like mutual funds, insurance, pension scheme
  • They can deal in foreign exchange (Forex)
  • They can apply for a full-fledged banking license
  • They cannot deal with sophisticated financial product
  • They can give a 50% loan to MSME
  • They have to maintain 75% of the total lending to the priority sector
  • Offers degital services for all financial transactions

Should you have account in small finance bank?

These banks are offering high interest rates on the fixed deposit as compare to the regular banks. Well, there are certain conditions that needs to be fulfill for availing the higher interest on the deposits.

The interest rates are applicable on the fixed deposit for more than 3 years term only.

You cannot withdraw money before 3 year under any condition.

The higher interest rates are applicable only on the fixed deposit of 15 lakhs or more.

Now, here you need to ask some questions to yourself:

  • Are you ok to deposit your hard money with a new player in the market?
  • Are you ok with this 3 years lock-in period?
  • What about customer service?
  • Can I get overdraft facility against my account?
  • Since these banks are lending to small and medium enterprises, which has a higher scope of default, am I ok with it?

As per me, you should avoid having bank account with small finance banks. As there are many regulations that they need to follow. Their business risk is higher and so your money with them is at higher risk as compared to regular banks.

Small finance banks are lending to the small business which are not stable. So there are all chances that the loan will not be paid up by the borrower. Under such situation, the money will be gone and those money are yours.

Conclusion:

The small finance banks are suitable for the rural part of India, where they need basic banking facility. It is not meant for urban area where you can deposit your money for slightly higher returns.

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