Small Finance Banks explained: why they exist, how they differ from payments banks and universal banks, priority sector norms and key exam facts.
WHAT HAPPENED
Small Finance Banks (SFBs) continue to grow their deposits, loans and branch networks, particularly in semi-urban and rural India. This note explains what SFBs are, what rules they follow and how they differ from other new-generation banks.
WHY SFBs WERE CREATED
SFBs were created to extend banking to segments that larger banks serve poorly: small business units, small and marginal farmers, micro and small industries and the unorganised sector. The RBI released the licensing guidelines in November 2014, and in-principle approvals were granted to ten applicants in 2015.
KEY REGULATORY FEATURES
- They are licensed under the Banking Regulation Act, 1949, and are scheduled banks.
- They can accept deposits and lend, like other commercial banks, but their lending is concentrated on small borrowers.
- 75% of Adjusted Net Bank Credit must go to the priority sector, and at least 50% of the loan portfolio must consist of loans of up to Rs 25 lakh.
- They must maintain CRR and SLR like other banks.
- Subject to eligibility conditions such as a minimum track record and capital, an SFB can apply to convert into a universal bank.
- Many SFBs began as microfinance institutions or NBFCs and converted into banks; some are listed on stock exchanges.
SFB VERSUS PAYMENTS BANK
- A payments bank can take deposits (with a cap per customer, which the RBI raised from Rs 1 lakh to Rs 2 lakh in 2021) and offer payments and remittance services, but it cannot give loans or issue credit cards.
- An SFB can lend, which is the key difference. India Post Payments Bank, Airtel Payments Bank and Paytm Payments Bank are examples of payments banks; Equitas, Ujjivan, AU, Jana and ESAF are examples of SFBs.
WHY IT MATTERS FOR FINANCIAL INCLUSION
SFBs push credit to small borrowers and offer deposit products in areas with few bank branches. Their growth depends on funding costs, since they have less access to cheap, stable deposits than the large banks, and on keeping asset quality stable in their small-ticket loan books.
EXAM ANGLE
Revise: RBI guidelines year (2014), 75% priority sector and 50% loans up to Rs 25 lakh, SFB versus payments bank (loans are the difference), voluntary transition to a universal bank, and the examples of SFBs.
Published on 12 Jul 2026. Source: Pratiyogita Kosh editorial team. Figures quoted in news reports change over time, so confirm the latest numbers from the RBI, PIB or the relevant ministry before an exam.