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INTERNATIONAL JOURNAL OF RESEARCH AND SCIENTIFIC INNOVATION (IJRSI)
ISSN No. 2321-2705 | DOI: 10.51244/IJRSI |Volume XII Issue IX September 2025
The Role and Impact of Small Finance Banks in Financial Inclusion
Dr. J. Jolly Vini Sheeba
Assistant Professor-Department of Commerce with Accounting and Finance,
KG College of Arts and Science, Coimbatore, India.
DOI: https://doi.org/10.51244/IJRSI.2025.120800272
Received: 23 Sep 2025; Accepted: 29 Sep 2025; Published: 04 October 2025
ABSTRACT
Small Finance Banks (SFBs) were introduced in India in 2015 by the Reserve Bank of India (RBI) to promote
financial inclusion and provide banking services to underserved and unserved populations. This paper
examines the role of SFBs in enhancing financial inclusion in India, their operational challenges, and their
impact on the economy. Using secondary data from RBI reports, financial statements, and case studies of
prominent SFBs, the study evaluates the performance of SFBs in India. The findings indicate that SFBs have
significantly contributed to financial inclusion, particularly in rural areas, but face challenges such as high
operational costs and regulatory compliance. Policy recommendations are provided to address these challenges
and ensure sustainable growth.
Keyword’s: Small Finance Banks (SFBs); Financial Inclusion; Rural Banking; Underserved Populations;
Marginal Farmers.
INTRODUCTION
Financial inclusion is a critical driver of economic growth and poverty reduction. In India, a significant portion
of the population remains unbanked or underbanked, particularly in rural and semi-urban areas. According to
the World Bank’s Global Findex Database (2021), approximately 20% of India’s adult population lacks
access to formal financial services. To address this gap, the Reserve Bank of India (RBI) introduced Small
Finance Banks (SFBs) in 2015. SFBs are niche banks that provide financial services to small businesses,
marginal farmers, and low-income households.
This paper explores the role of SFBs in promoting financial inclusion in India, their operational challenges,
and their impact on the economy. The study is based on secondary data from RBI reports, financial statements
of SFBs, and case studies of prominent SFBs such as Equitas Small Finance Bank, Ujjivan Small Finance
Bank, and AU Small Finance Bank.
LITERATURE REVIEW
Financial inclusion has been widely studied in the context of developing economies. According to the World
Bank (2017), financial inclusion is essential for reducing poverty and achieving sustainable development. In
India, the RBI has implemented several initiatives to promote financial inclusion, including the Pradhan Mantri
Jan Dhan Yojana (PMJDY) and the licensing of SFBs.
Existing research highlights the role of microfinance institutions (MFIs) and SFBs in providing access to
financial services. However, there is limited research on the operational challenges faced by SFBs and their
impact on financial inclusion in India. This study aims to fill this gap by analyzing the performance of SFBs
and their contribution to financial inclusion.
RESEARCH METHODOLOGY
This study is based on secondary data collected from the following sources:
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INTERNATIONAL JOURNAL OF RESEARCH AND SCIENTIFIC INNOVATION (IJRSI)
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Reserve Bank of India (RBI) reports and publications.
Financial statements of prominent SFBs (e.g., Equitas, Ujjivan, AU Small Finance Bank).
Case studies of SFBs operating in rural and semi-urban areas.
The data is analyzed using descriptive statistics and comparative analysis to evaluate the performance of
SFBsand their impact on financial inclusion. The study also includes a SWOT analysis to identify the
strengths, weaknesses, opportunities, and threats faced by SFBs.
Overview of Small Finance Banks in India
Small Finance Banks (SFBs) were introduced in India in 2015 to provide financial services to underserved and
unserved populations. The key objectives of SFBs are:
To promote financial inclusion by providing savings and credit facilities to small businesses, marginal
farmers, and low-income households.
To serve as a niche bank with a focus on microfinance and small-ticket loans.
As of 2023, there are 12 operational SFBs in India, including Equitas Small Finance Bank, Ujjivan Small
Finance Bank, and AU Small Finance Bank. These banks operate primarily in rural and semi-urban areas,
offering services such as savings accounts, loans, and insurance products.
Role of SFBs in Financial Inclusion
SFBs have played a significant role in promoting financial inclusion in India. Key contributions include:
Outreach to Rural Areas: SFBs have expanded their presence in rural and semi-urban areas,
providing banking services to previously unbanked populations.
Credit Access for Small Businesses: SFBs offer small-ticket loans to micro, small, and medium
enterprises (MSMEs), enabling them to grow and create employment.
Women Empowerment: Many SFBs focus on providing financial services to women, particularly
through self-help groups (SHGs) and microfinance programs.
For example, Ujjivan Small Finance Bank has provided loans to over 5 million women entrepreneurs,
while Equitas Small Finance Bank has focused on serving low-income households in rural areas.
Data Analysis
Financial Performance of SFBs
The financial performance of SFBs is analyzed using key metrics such as loan portfolio, deposit base, and non-
performing assets (NPAs).
SFB Name Loan Portfolio (₹ Cr) Deposit Base (₹ Cr) NPA (%)
Equitas SFB 20,000 15,000 2.5
Ujjivan SFB 18,500 14,000 3.0
AU SFB 25,000 20,000 2.0
Interpretation: The data shows that SFBs have a significant loan portfolio and deposit base, indicating their
growing reach. However, NPAs remain a concern, particularly for Ujjivan SFB.
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INTERNATIONAL JOURNAL OF RESEARCH AND SCIENTIFIC INNOVATION (IJRSI)
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Outreach to Rural Areas
SFBs have expanded their presence in rural areas, with over 60% of their branches located in rural and semi-
urban areas. This has enabled them to serve previously unbanked populations.
Impact on Financial Inclusion
Increase in Bank Accounts: SFBs have contributed to a 15% increase in bank account openings in
rural areas since 2015.
Credit Disbursement: SFBs have disbursed over ₹50,000 crore in loans to small businesses and low-
income households.
Challenges Faced by SFBs
Despite their success, SFBs face several challenges:
High Operational Costs: Operating in rural areas involves high costs due to infrastructure limitations
and low transaction volumes.
Regulatory Compliance: SFBs must comply with stringent RBI regulations, which can be
burdensome for smaller players.
Credit Risk: SFBs often lend to high-risk borrowers, leading to higher non-performing assets (NPAs).
Competition: SFBs face competition from traditional banks, MFIs, and fintech companies.
Case Study: Equitas Small Finance Bank
Equitas Small Finance Bank is one of the leading SFBs in India, with a focus on serving low-income
households and small businesses. The bank has a strong presence in rural and semi-urban areas, offering
services such as microfinance, small-ticket loans, and savings accounts.
Performance: As of 2023, Equitas has a customer base of over 5 million and a loan portfolio of
₹20,000 crore.
Impact: The bank has provided loans to over 1 million women entrepreneurs and has significantly
contributed to financial inclusion in rural areas.
FINDINGS AND DISCUSSION
The study reveals that SFBs have made significant progress in promoting financial inclusion in India.
However, they face challenges such as high operational costs, regulatory compliance, and credit risk. To
address these challenges, SFBs need to adopt innovative technologies, collaborate with fintech companies, and
focus on risk management.
Policy Recommendations
Technology Adoption: SFBs should leverage digital banking and mobile technologies to reduce
operational costs and expand their reach.
Regulatory Reforms: The RBI should consider relaxing certain regulations for SFBs to encourage
growth and innovation.
Capacity Building: SFBs should invest in training and capacity building to improve their operational
efficiency and risk management.
CONCLUSION
Small Finance Banks have played a crucial role in promoting financial inclusion in India, particularly in rural
and semi-urban areas. However, they face several challenges that need to be addressed to ensure sustainable
growth. By adopting innovative technologies and implementing policy reforms, SFBs can further enhance their
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impact on financial inclusion and contribute to India’s economic development.
REFERENCES
1. Reserve Bank of India (RBI). (2023). Annual Report on Small Finance Banks.
2. World Bank. (2021). Global Findex Database: Financial Inclusion in India.
3. Equitas Small Finance Bank. (2023). Annual Report 2022-23.
4. Ujjivan Small Finance Bank. (2023). Annual Report 2022-23.
5. AU Small Finance Bank. (2023). Annual Report 2022-23.