India’s Small Finance Banks were launched by the Reserve Bank of India in 2019 to bring banking closer to small borrowers, farmers, and informal workers. Six years later, they have expanded credit access and improved financial inclusion, though growth remains uneven. Deposits have more than doubled, and RBI has adjusted key rules—such as lowering the Priority Sector Lending requirement
Mumbai(ABC Live): Back in 2019, the Reserve Bank of India (RBI) launched its on-tap licensing plan for Small Finance Banks. These new banks were meant to bring affordable finance to small borrowers, farmers, and informal workers who rarely used regular banks.
Unlike older licensing rounds, the on-tap system allowed qualified players to apply whenever they were ready. Through this change, RBI wanted to open the market, promote competition, and spread banking deeper into small towns. As a result, policymakers expected more banks and more credit reaching rural India.
After six years, results look promising but uneven. On one side, total deposits have reached about ₹3.2 lakh crore and loans stand near ₹2.7 lakh crore (March 2025). On the other hand, growth is still led by a few big banks. For instance, AU Small Finance Bank is now large enough to seek a universal-bank licence, while smaller SFBs still face high costs and narrow profit margins.
Therefore, in June 2025, RBI reduced the Priority-Sector Lending (PSL) rule from 75 to 60 percent. By doing so, the central bank aimed to keep inclusion strong yet allow banks to stay profitable. This ABC Live audit looks at how far SFBs have come and what more is needed.
Why ABC Live Is Publishing This Now
The PSL cut and AU SFB’s next-stage licence make this the right moment to review the sector. Moreover, after six years of experience, we finally have enough data for a fair assessment. That’s why ABC Live prepared this report — to show what’s working, where progress is slow, and how India can strengthen its inclusion model.
Data and Insights
| Indicator | FY 2022 | FY 2025 (est.) | Trend & Meaning |
|---|---|---|---|
| Number of SFBs | 11 | 12 | Stable count — few new entrants; on-tap window under-used. |
| Deposits (₹ cr) | 1.5 lakh | 3.2 lakh | ≈ 28 % growth per year; public trust rising. |
| Loans (₹ cr) | 1.2 lakh | 2.7 lakh | ≈ 25 % growth per year; credit moving beyond microfinance. |
| MFI share (%) | 35 | 24 | Shift toward MSME and vehicle finance reduces risk. |
| GNPA (%) | 3.3 | 2.7 | Better asset quality with tighter controls. |
| RoA (%) | 2.1 (FY 24) | 1.5 (FY 25 est.) | Profits are normal after the post-pandemic spike. |
| PSL target (%) | 75 | 60 (FY 26) | Balances inclusion and sustainability. |
In short, SFBs are growing fast and handling risk better. However, few new licences show that capital needs and rules remain tough. Therefore, RBI’s 2025 adjustment looks both timely and necessary.
Have SFBs Met RBI’s Goals?
| Goal | Evidence (2025) | Result |
|---|---|---|
| Broaden inclusion | 25 % rural-branch rule met; loan mix widening. | ✔ Mostly met. |
| Stay profitable | Large SFBs are profitable; smaller ones are marginal. | ⚖️ Partial. |
| Keep licensing open | Few applications (VFS Capital is publicly known). | ⚠️ Weak. |
| Allow graduation | AU SFB approved as a universal bank (Aug 2025). | ⭐ Proven. |
Key Findings
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Rules work, but entry is slow. High setup costs limit interest.
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Balance improving. Lower PSL ratios help profits without hurting inclusion.
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Consolidation visible. Big SFBs expand into MSME and housing finance; small ones stabilise.
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Model validated. AU SFB proves that good governance allows scaling.
ABC Live Policy Suggestions
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Publish an annual inclusion scorecard covering branches and credit mix.
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Ease licensing and capital rules to welcome regional players.
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Provide tax or rate benefits for banks moving into Tier-3 and Tier-4 cities.
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Link capital rules to social impact, so responsible lending gets rewarded.
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Clarify pathways for UCBs and Payments Banks to become SFBs.
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Build independent risk and tech boards to improve governance.
ABC Live 2026 Targets
| KPI | Target FY 26 | Purpose |
|---|---|---|
| New SFB licences | ≥ 3 | Show that the on-tap policy works. |
| Non-MFI loan share | > 60 % | Ensure diverse growth. |
| Rural branch ratio | ≥ 30 % | Deepen reach. |
| Average RoA | ≥ 1.6 % | Keep profits steady. |
| GNPA ratio | ≤ 3 % | Hold loan quality. |
Conclusion
India’s Small Finance Banks have helped millions enter formal banking. At the same time, their growth is uneven and dominated by a few leaders. Consequently, RBI’s shift from counting licences to measuring impact marks a positive change. If India now adds simpler rules, lower costs, and better data, these banks can become strong local pillars of inclusive growth.
Verified References
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RBI (2019) – Guidelines for On-Tap Licensing of Small Finance Banks — rbi.org.in
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Business Standard (2025) – VFS Capital applies for SFB licence — business-standard.com
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Reuters (2025) – RBI cuts PSL target for SFBs to 60 % — reuters.com
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ICRA (2025) – Outlook for SFBs FY 2024-25 — icra.in
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Economic Times (2025) – AU SFB gets universal bank approval — economictimes.com
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