Small Finance Bank License
                     
SMALL FINANCE 
BANK    LICENSE
How to apply for Small Finance Bank 
License?
Small finance bank shall be registered 
as a public limited company under the 
Companies Act, 2013 and will be 
licensed under Section 22 of the 
Banking Regulation Act, 1949 and 
governed by the provisions of the 
Banking Regulation Act, 1949 and 
Reserve Bank of India Act, 1934 and 
with other relevant Statutes and the 
Directives/Regulations and other 
Guidelines/Instructions issued by RBI 
and other regulators from time to time.


Small finance banks are a type of niche banks. These 
type of banks carrying small finance bank license 
provides basic banking services related to acceptance 
of deposits and lending. Their main aim is to provide 
financial services to those sections of the economy 
which are not being served by the other banks, such 
as small business units, small and marginal farmers, 
micro and small industries and entities of the 
unorganized sector.
Small Finance Banks make money by collecting money 
from current account & saving account depositors, 
fixed depositors, commercial papers, Wholesale 
deposits, refinancing etc. On saving account they offer 
interest rates between 6 to 7 % subject to conditions. 
On fixed deposit around 9%, interest is offered. SFBs 
offers two types of products such as group loans & 
individual loans. These products can be further divided 
into agricultural, education, home improvement, home 
purchase, livestock loans etc.
SFBs do not get a guarantee against the loan 
offered. In the group loans, they are offered 
on the joint liability. In case any member of 
the group does not pay than the whole group 
is held liable for the same.
Small Finance Banks require prior approval for 
the opening of bank branches from RBI. 
Universal banks do not require such 
permission for roll out a branch in the 
unbanked rural areas.
Small Finance Banks required to extend 75% 
of their Adjusted Net Bank Credit (ANBC) to 
the classified sectors under priority sector 
lending (PSL) by the RBI. Agriculture, Small 
scale industries, Small business/ service 
enterprise, Microcredit, Education loans.

What is OBJECTIVE of Small 
finance bank?
Its primary purpose is to provide an 
institutional mechanism for promoting 
rural & semi-urban savings and also 
providing credit for viable economic 
activities in local areas and provision of 
savings vehicles primarily to unsaved and 
underserved sections of the population, 
and
Supply of credit to small business units; 
small and marginal farmers; micro and 
small industries; and other unorganized 
sector entities, through high technology-
low cost operations.

What are RULES & REGULATIONS for Small finance banks?
• Small finance bank will undertake basic banking services of acceptance of 
deposits and lending to unsaved and underserved sections.
• It will provide banking facilities to boost saving habits.
• It will mainly target small business units, marginal farmers and unorganized 
sector entities through high technology-low cost operations.
• They are established as a public limited company in the private sector 
which is promoted either by individuals, corporate, trust or societies.
• They are governed by the provisions of Reserve Bank of India act 1934, 
Banking Regulation act 1949 and other relevant statutes.
• Small finance banks are considered as non-scheduled banks and they are 
not allowed to borrow funds from the Reserve Bank of India like other 
scheduled banks.
RBI has clarified that SFBs can convert themselves into universal banks 
through the transition would not be automatic and it will require regulator’s 
approval.
What is minimum capital adequacy requirement for 
Small finance bank License?
Particulars %
Minimum Capital Requirement 15%
Common Equity Tier 1 6%
Additional Tier I 1.5%
Minimum Tier I capital 7.5%
Capital Conservation Buffer Not Applicable
Pre-specified Trigger for conversion of CET1 at 6% up to March 31, 2019, and 
AT1 7% thereafter
Key CHALLENGES faced by Small 
finance bank
It is not easy to maintain ideal technology 
platform which should benefit both the 
customers for ease of transactions and to the 
bank as a reduction in cost. Previously 
functioning as MFIs (Microfinance institutions), 
Small financial Banks have not handled 
deposits before. It is required for them to 
invest in the infrastructure which enables 
deposits through establishing a physical 
branch network to mobilize correspondent 
network, ATM network, and partnering with 
banks. Capital adequacy ratio, cash reserve 
ratio (CRR) and statutory liquidity ratio (SLR) 
will be a significant burden to manage which 
will result into reduced earnings until SFBs 
develop a substantial depositor base.

THREATS AND CHALLENGES TO SMALL FINANCE BANKS
1. High Costs of Transformation: SFBs will 
have    to    bear    the    incremental    cost 
   of infrastructure, human resources and 
organizational  transformation.  Some  of  
the areas   which   might   entail   high   
costs   are: Upgrade of MIS and loan 
origination systems to  a  core  banking  
solution,  establishing  risk management 
and treasury functions
2. Efforts and Cost of Deposit 
Mobilization:SFBs have no prior experience  
of  deposits  handling  as  majority of them  
were  functioning as  MFIs. There  are two  
facets  of  the  challenge  posed  in  this 
domain.
3. Competition: Competition  will  be  fierce  as SFBs    will    be    facing    
competition    from existing    banks    and    non-bank    financial companies 
 (NBFCs)  who  may  be  looking  to extend  their  reach  to  serve  the  
unbanked  and under  banked,  especially  in  semi-urban  and rural  areas.
4. Controlling NPAs: The challenge for SFBs would be to control NPAs as an 
unfavourable monsoon  would  have  an  adverse  impact  on farm  loans.  
Similarly,  any  slowdown  in  the industrial  sector  will  impact  the  small  
and medium-sized enterprises (SMEs), which will face   liquidity   crunch.   
Therefore,   on   both these counts, they would be at a disadvantage 
compared to the commercial banking system.
5. Adoption of Technology:  Use of technology  can  substantially  cut  down  
the operational  costs  for  SFBs,  however  these banks  do  not  have  the  
required  capitalto invest in technology. 
6. Prudential   Norms:  The   SFBs   will   be 
subject   to   all   the   prudential   norms   and 
regulations  of  RBI  as  applicable  to  existing 
commercial  banks  including  requirement  of 
maintenance  of  Cash  Reserve  Ratio  (CRR) and  
 Statutory   Liquidity   Ratio   (SLR). 
7. Issues in Human Resource Management:  SFBs  
 employees   have   expertise   in   micro lending  
operations  with  limited  exposure  to market     
deposit,     insuranceor     pension products. The 
credit teams are not well versed with  the  credit  
assessment  techniques  being followed   at   the   
commercial   banks.
8. Developing a Risk Management framework:   
Developing   an   effective   risk management   
framework   and   controls   is   a major   
challenge   faced   by   SFBs.
Impact of SmallFinance Bank on Indian Economy
The  financial  and  economic  conditions  of  India  are  superior  then  other  country  in  
the  world.Credit,  market  and  liquidityrisk  studies  suggest  that  Indian  banks  are  
generally  flexible  and  havewithstood  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  paymentbanks and small 
finance banks.The basic objective for the setting up of SFBs are provide credit facilitiesto 
 small  business  units,  small  farmers,  micro  and  small  industries  and  unorganized 
sectors  and  also  toimprove financial inclusion in the country.Small  Finance  Banks  are 
 providing  financial  services  at  low  transaction  cost.  
It  is  very  difficultfor  commercial  banks  to  open  branches  in  every  village  so  by  
mobile  phones  SFBs  provide  low  costplatform  for  banking  services  to  every  
citizen. y. SFBs also provide benefitto  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  
reducedependency on cash so cashless economy will be opted.

RBI GUIDELINES ON SMALL FINANCE BANKS
Small Finance Banks (SFBs) are like the last bricks to be laid in  the  wall  of  financial  
inclusion  cemented  together  by  the Reserve Bank of India guidelines. The scope of 
activities of a Small  Finance  Bank  would  primarily  be  to  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 unorganized sector entities.Some of the other guidelines stipulated in this 
regard are:
a. Minimum  paid-up  capital  of  Rs  100  crore  has  been stipulated for the entity setting 
up SFBs
b. Prudential regulatory norms for SFBs will be suitably calibrated given the financial 
inclusion focus of these banks and will be declared from time to time by RBI.
c. SFBs  must  allocate  75%  of  their  lending  to  priority sector,  such  as  agriculture,  
small  business,  micro credit, education, or housing.
d. 50%  of  an  SFB’s  lending  must  be  comprised  of advances  less  than  25  lakhs  to  
ensure  credit  reaches the underserved sections of the market.
e. SFBs are required to open at least 25% of its branches in unbanked rural centres.
f. The bank’s total lending to a single borrower is capped at 10%, and for a group it is 
capped at 15% of capital funds.
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