Previous Year Question
What is the purpose of setting up Small Finance Banks in India?
To supply credit to small business units
To supply credit to small and marginal farmers
To encourage young entrepreneurs to set up businesses, particularly in rural areas
Select the correct answer using the code given below:
1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3
Correct Answer: A
Detailed Solution
The RBI issued licensing guidelines for Small Finance Banks, or SFBs, in 2014. Their principal objective is to advance financial inclusion by providing savings and credit facilities to sections that have received inadequate services from the conventional banking system.
Statement 1 is correct.
SFBs were established to provide credit to small business units, micro and small industries and entities operating in the unorganised sector.
Small businesses often encounter difficulties in obtaining institutional credit because of inadequate collateral, limited formal financial records and the absence of established credit histories. SFBs can address this gap through local knowledge, small-ticket loans and suitable banking products.
Statement 2 is correct.
Small and marginal farmers are explicitly included among the target borrowers of SFBs. These banks are expected to improve access to institutional credit for agriculture, allied activities, farm equipment, animal husbandry and other productive rural activities.
Under the RBI’s original licensing framework, an SFB was required to extend a prescribed proportion of its Adjusted Net Bank Credit to priority sectors. It was also required to maintain a prescribed portion of its loan portfolio in small-ticket loans so that it did not become concentrated only on large borrowers.
Statement 3 is incorrect.
The establishment of businesses by young entrepreneurs in rural areas may be a possible outcome of credit provided by SFBs. However, the RBI’s stated objectives for establishing SFBs did not identify this as a separate and explicit purpose.
The official objective was to provide savings facilities to underserved sections and credit to:
small businesses;
small and marginal farmers;
micro and small industries; and
entities in the unorganised sector.
Statement 3 cannot therefore be treated as correct merely because it represents a possible developmental benefit.