How Small Finance Banks are Different from Other Kinds of Banks??

What are Small Finance Bank ???

The Small finance banks are a kind of niche banks which can provide basic banking services like accepting deposits and lending facility to customers. The focus is only on small businesses, marginal farmers and micro industries.

The small finance bank can perform all kind of operations which normally commercial banks provides but at smaller level and targeting low level income segment.

The aim of the small finance bank is to provide financial inclusion to sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganized sector entities.The minimum paid-up equity capital for small finance bank is 100 crores.

Objective

The main purpose behind having small finance banks is to expand access to financial services in rural and semi-urban areas.The Objective is to provide an institutional mechanism for promoting rural and semi urban savings and for providing credit for viable economic activities in the local areas.

• They were established as public limited companies in the private sector
• They are promoted either by individuals, corporate, trusts or societies
• The minimum paid up capital of such banks was Rs. 5 crores
• The promoter’s contribution should be at least Rs. 2 crores

Difference Between Payment Banks and Small Finance Banks

• The payment banks are to provide payment solutions Whereas the Small Finance Banks are to provide basic banking services for financial inclusion and boosting saving habits among lowest strata of the society
• The Small Finance Bank can take any deposit but Payment banks can accept only 1 lacs per customer
• The Payment can’t lend but Small finance bank can lend. The focus will be on small lending
• The Payment bank can provide remittance services But The small finance bank can provide both remittance services and credit cards

How it will change current financial system??

The licenses given to payment banks and small financial banks will be the major step towards pushing financial inclusion in the country.The main target will be small businesses and low-income household by providing them financial services at low transaction cost.

The Payment bank will reduce dependency on cash and will increase m-commerce, as mobile wallets will be used as payment option.

The Small financial banks will extend formal financial access to small enterprises that are currently dependent on high-cost unorganized sector lending. According to RBI estimates 90 percent of small enterprises do not have access to formal financial institutions. So it will be a huge step towards full financial inclusion.

The Commercial banks mainly focus on funding large and medium industries or give loans for home, education or vehicle purposes. But it is very difficult for restaurants or any other small enterprises to get working capital funding. Small financial banks can fill this gap and can provide loans.

How it will affect Commercial Banks??

The commercial banks customers might move or reduce due to shift of savings account money into payment bank account. So low cost deposits of banks might reduce drastically.

The commercial banks’ regular fee incomes might reduce. The fees include cash transfers, cheques withdrawals, fee for making demand drafts or ATM transactions, etc.

Limitation and Challenges

• The initial challenge for the newly licensed banks will be to adjust their promoter’s contribution and foreign shareholding to comply with the RBI guidelines
• The Small banks are geographically concentrated and there are more vulnerable to systemic risk such as crop prices, and regional economic performance as compared to large banks
• The local nature also makes them more prone to capture. This lead to persistent governance problems and owing to the higher exposure to risk, as they should have to pay a higher rate to their depositors which in turn, might create the need to make riskier loans resulting in a vicious cycle of rising non-performing assets
• To restructure and transform into a bank from a non-banking financial institution and offer multiple banking products. This requires large capital to build ATM’s, Branch network. This will make the banking service costlier.