Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the Economic Times – ET Edge Insights, its management, or its members


India was introduced to the concept of financial inclusion in 2005 by the RBI. Since then, it’s been a goal that the nation has been yearning to achieve. And, progress has undoubtedly been made.

As per the RBI, the annual Financial Inclusion Index for the period ending March 2021 stands at 53.9, a major improvement from the 43.4 that was recorded in the period ending March 2017. But, what role do the Small Finance Banks (SFBs) of India have in this development, and how has financial inclusion impacted rural India? Allow this article to walk you through these questions.


Why SFBs can bring financial inclusion to rural India?

India is home to the world’s second-largest unbanked population that stands at 190 million, and this is proof to the fact that extending banking services to those living in remote and rural areas of the country has been a challenge. That’s where SFBs come in.

SFBs, unlike Local Area Banks, are often private entities that perform basic banking activities and make these services available to underserved segments of the population, such as unorganized entities, small farmers, or even micro businesses that often function in rural India. Traditionally, they’ve been invested in retail and small business loans. The business model that SFBs follow is a mix of formal, informal lending methods, where 50% of the loans under 25 Lakhs are lent to the priority sector along with beneficial interest rates, and easy accessibility makes them highly suited to rural parts of the country. In order to lend to the unbanked population, often these SFBs raise finance from HNIs and Middle Class Segment in form of deposits and then further lend to the customers in form of loans to meet their needs and uplift them.

By offering credit to everyone from marginal farmers to migrant workers and doing away with the concept of creditworthiness, SFBs have been able to bring MSMEs and even unorganized businesses into the financial ecosystem. They come with a tech-centric and cost-friendly approach, making it easy for them to set up operations at most places, in turn regularizing lending and banking processes in rural and remote parts of the country. Their ability to underwrite loans to self-employed people with no credit history, enables them to bring even the tiniest unit of rural India into the banking ecosystem, making them a financial entity that is living up to the crux of financial inclusion.

How close are SFBs to their goal of financial inclusion in rural India?

SFBs cater to a massive demography and have a major role to play in terms of socioeconomic progress in the country. They are important members of the priority sector lending space and are a lot more than simply financial institutions who provide banking services. Hence, it is essential to keep that in mind when evaluating their progress.

By providing women access to not just loans but also the whole range of banking services, SFBs have enabled independence among women in rural India and also empowered them to pursue their entrepreneurial dreams. Micro-credit is one among the several services offered by SFBs that has provided women the opportunity to apply for loans, as this kind of credit is often more affordable for women in rural India who barely have any access to finances of their own. SFBs make credit and banking accessible for women, in turn finally making them a part of India’s financial inclusion narrative.

It is not just women that have benefited from the presence of SFBs in rural India. SFBs offer agricultural loans, home loans, and even used commercial vehicle loans, at an affordable rate, while at the same time offering way higher interest rates on deposits than their commercial peers, SFBs are also trying to bring financial inclusion via Small Ticket Recurring Deposits and Fixed Deposits. Hence, be it individual farmers, smaller group of sellers, or even unregistered businesses, SFBs have something for everyone in rural India.

Micro banking has always served as an effective conduit to provide finance to the unbanked population of the country, especially in the remote areas, SFBs on the other hand have enabled credit to these areas. SFBs tap the areas where services of large banks aren’t available and in turn offer easy access to banking services, faster loan processing, and convenient repayment terms to this segment.

A huge portion of the Indian population still lacks access to banking services, including savings, recurring and fixed deposit accounts. It is government’s aim and the regulators agenda to facilitate this unbanked population with easy accessibility of funds. Small Finance Banks and Microfinance institutions provide them with small ticket loans with one of the most competitive interest rates, low ticket recurring deposit accounts to promote savings among them. These institutions additionally also facilitate these customers with insurance, and remittance, also initiate workshops locally for financial counselling, training, and support with starting a business, all in a convenient manner.

Given this fact, that SFBs can actually reach to the hinterlands of India, enable access to credit, it is not difficult to decipher why SFBs are central to the cause of financial inclusion in rural India.

This Article has been authored by Murali Vaidyanathan, – Senior President & Country Head (Branch Banking, Liabilities, Products, and Wealth), Equitas Small Finance Bank Limited. Views are personal.


Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the Economic Times – ET Edge Insights, its management, or its members

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