Small Finance Banks (SFBs), introduced by the Reserve Bank of India (RBI), were created to promote financial inclusion by offering banking services to underserved and unbanked sections of the population. These include micro and small enterprises, small farmers, and workers in the informal sector.

Operating under a specially designed regulatory framework, SFBs emphasise grassroots-level banking. In this article, we’ll explore what defines an SFB, how they function, and spotlight three leading players: Fincare Small Finance Bank, Fino Payments Bank, and Utkarsh Small Finance Bank.

Understanding Small Finance Banks

Regulatory Framework and Purpose

The RBI’s guidelines for SFBs are designed to ensure these banks stay aligned with their core mission: serving the financially excluded. Some key regulatory requirements include:

• Priority Sector Lending:
  At least 75% of Adjusted Net Bank Credit (ANBC) must be allocated to priority sectors such as agriculture, small businesses, and low-income groups.
  
  
• Rural Focus:
  A minimum of 25% of banking outlets must be located in rural areas that lack access to formal banking.
  
  
• Capital Adequacy:
  SFBs must maintain a capital adequacy ratio of 15% of risk-weighted assets.
  
  
• Growth Potential:
  After five years of operation, an SFB can apply to become a universal bank, allowing it to offer a wider range of services.
  
  

How SFBs Differ from Commercial Banks

While SFBs and commercial banks both offer savings accounts, loans, and payment services, their focus and scale differ significantly:

• Target Market:
  SFBs are created to serve niche markets, particularly rural communities and micro-entrepreneurs, whereas commercial banks target a broader audience.
  
  
• Operational Scale:
  SFBs generally operate at a more localised or regional level with a focus on community-based banking.
  
  
• Revenue Sources:
  SFBs primarily earn through priority sector lending, whereas commercial banks have diverse income streams such as corporate loans, investment services, and treasury operations.
  
  

Highlights of Leading Small Finance Banks

1. Fincare Small Finance Bank

Established in 2017, Fincare positions itself as a tech-first institution, catering to rural and semi-urban populations. Its strategy centers around digital-first operations that improve efficiency and scalability.

Key Highlights:

• Provides high-margin loans to micro and small enterprises.
  
  
• Relies heavily on technology integration for cost control.
  
  
• Has shown steady growth in net interest income and operational profits.
  
  

Recent Developments:

• In 2023, Fincare received SEBI approval to launch an IPO, aiming to raise ₹1,330 crore:
  
  
  • ₹330 crore through new equity issuance.
    
    
  • ₹1,000 crore via offer for sale from existing shareholders.
    
    
• The funds will be used to support business expansion, boost Tier-1 capital, and invest in digital infrastructure.
  
  

2. Fino Payments Bank

Originally launched as a payments bank, Fino now plans to transition into a Small Finance Bank to expand its services. Fino is known for its hybrid service model, which blends digital technology with an extensive merchant network.

FY 2024–25 Performance:

• Reported revenue of ₹1,847 crore, a 25% increase year-over-year.
  
  
• Net profit stood at ₹92.5 crore, marking its fifth consecutive year of profitability.
  
  
• Operates with a lean, tech-enabled model with minimal fixed costs.
  
  

Future Plans:

• Transitioning into a Small Finance Bank to offer secured loans and grow its deposit base.
  
  
• Plans to double revenue by 2028, leveraging:
  
  
  • A network of over 1.3 lakh merchants.
    
    
  • Micro ATMs and Aadhaar-enabled payments.
    
    

3. Utkarsh Small Finance Bank

Utkarsh is a key player in northern and eastern India, known for its strong emphasis on microfinance. While this model has enabled rapid customer acquisition, it also comes with elevated credit risk during economic instability.

FY 2024–25 Financial Overview:

• Reported net profit of ₹24 crore, a sharp decline from ₹498 crore the previous year, due to increased provisioning for non-performing assets (NPAs).
  
  
• Deposits rose by 23.4%, reaching ₹21,566 crore—indicating strong customer confidence.
  
  

Strategic Shifts:

• With nearly 88% of its loan book tied to microfinance, Utkarsh is now working to diversify its portfolio.
  
  
• Plans to introduce new financial products and expand into less saturated markets to balance risk and scale operations.
  
  

Conclusion

Small Finance Banks play a vital role in deepening financial inclusion in India. Whether it’s Fincare’s digital-first model, Fino’s tech-enabled merchant network, or Utkarsh’s grassroots microfinance presence, each bank showcases the diverse approaches within this space.

As these institutions grow, their continued success will depend on:

• Embracing innovation,
  
  
• Managing credit risk effectively,
  
  
• And adapting to regulatory changes.
  
  

For both consumers and investors, SFBs represent more than just banking—they’re a glimpse into a more inclusive financial future for India.

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