UPSC Prelims 2017 Q40: Indian Economy – Digital Payments & Financial Inclusion
What is the purpose of setting up of Small Finance Banks (SFBs) in India?
1. To supply credit to small business units
2. To supply credit to small and marginal farmers
3. To encourage young entrepreneurs to set up business particularly in rural areas.
Select the correct answer
using the code given below:
- (a) 1 and 2 only
- (b) 2 and 3 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Answer: (a) 1 and 2 only
Explanation
Small Finance Banks (SFBs)
RBI issued the licensing guidelines in November 2014.
The stated aim is financial inclusion.
| Purpose listed | Verdict | Fact |
|---|---|---|
| 1. To supply credit to small business units | Correct | Named in the RBI guidelines |
| 2. To supply credit to small and marginal farmers | Correct | Named in the RBI guidelines |
| 3. To encourage young entrepreneurs to set up business particularly in rural areas | Incorrect | Not a stated purpose of SFBs |
Key rules for SFBs:
| Feature | Detail |
|---|---|
| Priority sector lending | 75% of adjusted net bank credit |
| Small loans | At least 50% of loans up to Rs 25 lakh |
| Deposits | Can accept all deposits (unlike payments banks' limit) |
| Also serve | Micro and small industries, unorganised sector |
Answer: (a) 1 and 2 only.
Why each option is right or wrong
- (a) CORRECT. SFBs supply credit to small business units and small and marginal farmers.
- (b) Incorrect. Statement 3 is not a stated purpose, and statement 1 is left out.
- (c) Incorrect. Encouraging young entrepreneurs is not in the RBI guidelines for SFBs.
- (d) Incorrect. Statement 3 goes beyond the RBI's stated objectives for Small Finance Banks.
Key point
Small Finance Banks (2014 guidelines): credit to small business units, small and marginal farmers, micro and small industries; 75% priority sector lending.
Remember
SFB = small businesses + small farmers; 75% priority sector.
Common mistakes
- Marking statement 3 because it sounds desirable; go by the RBI's stated objectives.
- Confusing SFBs with payments banks, which cannot lend.
- Mixing SFBs up with MUDRA, which funds small entrepreneurs.
Exam tip
For 'purpose of' questions, stick to the official wording. Good-sounding extras are often traps.
Sources
- Reserve Bank of India — Guidelines for Licensing of Small Finance Banks in the Private Sector (27 November 2014)
- Reserve Bank of India — Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (2014)