PrepMaticExam glossary · Bank exams
Small finance bank: meaning, purpose and rules
On this page
A small finance bank (SFB) is a type of bank licensed to take deposits and lend, with a specific focus on financial inclusion: serving small business units, small and marginal farmers, micro and small industries and other unorganised-sector entities. SFBs are licensed under Section 22 of the Banking Regulation Act, 1949 and registered as public limited companies under the Companies Act.
How SFBs came about
The RBI issued guidelines for "small banks" in November 2014. In September 2015 it gave in-principle approval to ten applicants, many of which were microfinance institutions or NBFCs, which then converted. Chennai-based Equitas Small Finance Bank is one of them. They are regulated by the RBI, are scheduled banks and can offer savings, current and fixed deposit accounts.
What an SFB can and cannot do
An SFB can: accept deposits of all types, lend (mainly small loans), open branches and ATMs, take part in payment systems, and distribute insurance, mutual funds and pension products.
An SFB cannot: set up subsidiaries to carry on non-bank financial business, lend to its promoter group, or ignore the priority sector and small-loan rules below.
The core rules
- 75% of adjusted net bank credit must go to the priority sector. This is higher than the target for commercial banks; see priority sector lending.
- At least half of the loan portfolio must consist of small loans up to a size prescribed by the RBI (₹25 lakh in the original guidelines).
- They must also meet CRR and SLR like other banks.
- After a period of satisfactory performance, an SFB can apply to the RBI to become a universal bank.
Figures are from the RBI's licensing guidelines; confirm the latest at rbi.org.in.
SFB vs payments bank
Both are "differentiated banks", but an SFB can lend widely and a payments bank cannot. An NBFC lends too but cannot take demand deposits.
How bank exams ask about it
Look for questions like "SFBs are licensed under", "the priority sector requirement for SFBs", "which committee recommended differentiated banks" (Nachiket Mor Committee), and "which of the following is an SFB". The names of banks change through mergers, so the list belongs to current affairs. Keep this with the rest of the bank types in banking awareness.
Frequently asked questions
Are deposits in an SFB insured?
Yes. SFBs are banks covered by deposit insurance up to the limit in DICGC.
Can an SFB give a home loan?
Yes, SFBs can lend across segments, within the RBI's limits on size and the priority sector requirement.
Know which section is costing you the cut-off
Take a free bank-exam assessment on PrepMatic. It shows where you stand in Quant, Reasoning and English, then builds a daily study plan and mock tests focused on your weak subjects.
Start free assessment →Free forever plan · No credit card · 2-minute setupRelated
- Payments bankA payments bank accepts small deposits and offers payment services but cannot lend or issue credit cards. Features, balance cap, licensing and exam facts.
- NBFCAn NBFC is a company that lends and invests like a bank but cannot take demand deposits. Meaning, types, scale-based regulation and bank differences.
- Regional Rural BankRegional Rural Banks are scheduled banks set up in 1975 to serve rural India. Ownership split, sponsor banks, regulation, consolidation and IBPS RRB link.
- Priority sector lendingPriority sector lending makes banks lend a set share of credit to farming, MSMEs, housing, education and more. Categories, targets and PSLCs.
- Financial inclusionFinancial inclusion means affordable banking, credit, insurance and pensions for low-income and rural people. Tools, schemes and how exams ask it.
More in Bank exams
- SIDBISIDBI is the principal financial institution for MSME financing. Full form, 1990 formation, refinance, fund of funds, MUDRA link and how banking exams ask it.
- Stand-Up IndiaStand-Up India supports SC, ST and women entrepreneurs with bank loans from ten lakh to one crore rupees for a new business. Features and exam facts.
- Standing deposit facilityThe standing deposit facility lets banks park surplus funds with the RBI without collateral and sets the floor of the rate corridor. Meaning and exam facts.
- SEBISEBI is the regulator of India's securities market. Full form, 1988 and 1992 milestones, board, functions, powers and how banking exams ask about it.
- Statutory liquidity ratioSLR is the share of deposits that banks must hold in cash, gold or government securities before lending. Meaning, legal basis, example and exam angles.
- Scheduled bankA scheduled bank is listed in the Second Schedule of the RBI Act, 1934. Meaning, Section 42(6) conditions, types and difference from non-scheduled banks.
- SARFAESI ActThe SARFAESI Act lets banks take over and sell secured assets of defaulting borrowers without going to court. Process, notice period and exam facts.
- RTGSRTGS is the RBI system for large-value payments settled one by one in real time and final once sent. Full form, minimum amount, timings and exam facts.