What is Small Finance Bank’s Micro Loan in India?

What is Small Finance Bank in India?

Small Finance Bank has been registered as Public Limited Company under Companies Act in 2013 and got a license under Section22 of the Banking Regulation Act 1949. It has been governed by reserve Bank of India (RBI) and required to take prior approval every time from RBI when they decide to open a new branch. The unorganised sectors which do not get support from any other banks take shelter under Small Finance Bank. Therefore, Small Finance Bank provide basic facilities to the economic sector of the country which includes small business units, small farmers and small industries. In other words, Small banks are looking to diversify in Micro, Small and Medium Enterprises (MSME).

Small Finance Bank provides two types of loan- Individual Loan and Group Loan. As its name suggest itself that individual loan is taken by the individuals. On the other hand, group loan is offered on joint liability which means if even a single person fails to pay off the amount then the whole group will be liable for this default.

Main Objectives Of Small Finance Bank

Its utmost objective is to provide institution mechanism for promoting savings among unorganized sectors of the country who are not able to grow due to isolation. 

Then it also helps provide credits to small businesses and micro and small industries who cannot get enough funds from other banks due to the long procedure and verification.

It also provides a framework to promote rural and semi- urban savings and provides saving vehicles as well. Moreover, by using hi-tech, low-cost technology, supply of credit to small businesses.

Hence, these small banks are doing their best in order to conserve the small businesses and various hands associated to them. Indirectly, their funds will help provide all the basic amenities to the ignored section of our country.

Major Challenges

The second biggest challenge is that these small banks needs huge amount to invest in infrastructure or businesses or industries. They have got a little amount of funds which is

not sufficient to fulfill the needs of a large section who are facing trouble due to loss in their work.

These small banks are amateur or naïve to handle deposits. As they need to deal with various people which is troublesome unlike bigger banks.

Capital adequacy ratio, cash reserve ratio (CRR) and statutory liquidity ratio (SLR) will be an aspect for managing.  Which will result in reduced earnings until SFBs develop a substantial depositor base for managing them.

Registration for Small Finance Banks

SFBs are registered as a public company under the Companies Act, 2013. They are licensed as under Section 22 (1) of the Banking Regulation Act, 1949 (“BR Act”). They are to be governed by the RBI Act, 1934; BR Act; Payments and Settlements Act, 2007; Credit Information Companies (Regulation) Act, 2005; Deposit Insurance and Credit Guarantee Corporation Act, 1961; and any other relevant guidelines and prudential norms issued by the RBI or any other regulators from time to time. SFBs are to be given the status of a scheduled bank once they start their operations and would be found relevant to Sec 42 (6) (a) of the RBI Act, 1934.

There are total 10 companies which have gotten license from Reserve Bank of India (RBI). These are Equitas, Janalakshmi, Ujjivan, ESAF, Capital Local Area Bank, Suryoday, AU Small Finance Bank, Utkarsh Small Finance Bank,Fincare Small Finance Bank, RGVN Small Finance Bank

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