Small Finance Bank License:

Small finance banks are registered as a public limited company and are licensed under section 22 of the Banking Regulation Act, 1949 and are primarily governed by the Banking Regulation Act, 1949 and RBI Act, 1934. These are a niche category of banks that provide basic banking services like accepting deposits and lending. The purpose of such banks is to enable and encourage financial inclusion in the economy and make finance available to those people and businesses which are not served by conventional banks like small and marginal farmers, micro and small industries, and entities that are a part of the unorganized sector. Before opening a new branch, a small finance bank must seek approval from the Reserve Bank of India.


  • Enhancing financial inclusion in the economy by providing finance and supporting small businesses, micro and small industries, and entities belonging to the unorganized sector.
  • Promoting savings amongst the rural and semi-urban sections of the society.
  • Can also become a Category II Authorized dealer in the foreign exchange business.


Eligibility Criteria:

  • Minimum paid-up capital of Rs. 100 crores with a minimum CAR of 15% on risk-weighted assets.
  • The minimum initial contribution of promoters should be above 40% (26% to be bought within 12 years of commencement).
  • Foreign shareholding should be in accordance with the FDI policy for private banks.
  • Small finance banks are subjected to all rules and regulations of commercial banks.
  • Must extend 75% of net credits in the form of priority sector lending.
  • 50% of loans must be in Rs 25 lakh range.

Procedure for Filing Application:

  • Application for obtaining a license as a Small Finance Bank in Form III shall be made to the Chief General Manager, Department of Banking Regulation, Reserve Bank of India, 13th Floor, Central Office Building, Mumbai, Maharashtra – 400001.
  • The applicant should provide a detailed business plan and other required information.
  • The application is then evaluated by an External Advisory Committee consisting of pre-eminent members like bankers, finance professionals, chartered accountants, and so on.
  • The final decision to issue an in-principle approval for setting up a bank lies with the RBI.

Rules and Regulations:

  • Should not violate the working framework of conventional banks. They must serve their purpose by providing financial support to the underserved sectors of society.
  • It should promote and encourage savings among the backward sections of the society.
  • They must perform their primary tasks of accepting deposits and lending.
  • These banks shall not violate the provisions of the RBI Act 1934 and the Banking Regulation Act, 1949.
  • These banks are established as a public limited company and are promoted via individuals, corporates, societies, or trusts.
  • These banks are considered as non-schedule banks which prohibits them to borrow funds from the RBI like the other scheduled banks.

Key Challenges Faced:

  • It is difficult for such banks to quickly adapt to the evolving technology in order to provide a seamless experience to their customers.
  • They need a lot more investment in order to enable deposits via ATM.
  • Initially, their earnings are reduced due to the maintenance of ratios like CRR and SLR.
  • Previously small finance banks did not handle deposits as they were operating as Microfinance institutions.

Setting up and incorporating a small finance bank can be challenging. If you want to set up a small finance bank, HBF Direct Ltd. can help you with the entire process and make it a seamless experience for you. Contact us if you have any queries!

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