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Q40 (IAS/2017) Economy › Money, Banking & Inflation › Banking structure Official Key

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:

Result
Your answer: —  ·  Correct: A
Explanation

The correct answer is option A (1 and 2 only).

The objectives of setting up small finance banks include furthering financial inclusion by provision of savings vehicles and supply of credit to small business units, small and marginal farmers, micro and small industries, and other unorganised sector entities[1]. The small finance banks shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities[2].

Therefore, statements 1 and 2 are correct as they directly align with the stated purposes of SFBs. However, statement 3 is incorrect because the specific purpose of "encouraging young entrepreneurs to set up business particularly in rural areas" is not mentioned in the official objectives of Small Finance Banks. While SFBs do provide credit to small businesses and operate in underserved areas, their mandate is broader financial inclusion rather than specifically targeting young entrepreneurs in rural areas.

Sources
  1. [1] https://en.wikipedia.org/wiki/Small_finance_bank
  2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 21. Payment Banks: > p. 87
How others answered
Each bar shows the % of students who chose that option. Green bar = correct answer, blue outline = your choice.
Community Performance
Out of everyone who attempted this question.
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got it right
PROVENANCE & STUDY PATTERN
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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. 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 credi…
At a glance
Origin: Books + Current Affairs Fairness: Moderate fairness Books / CA: 6.7/10 · 3.3/10

This question is a classic 'Official Mandate vs. General Good' trap. Statements 1 and 2 are verbatim from RBI guidelines found in standard texts. Statement 3 sounds positive but adds a specific demographic ('young') not present in the official definition. Strategy: For institutions, memorize the exact beneficiary list; do not assume 'nice-sounding' goals are official objectives.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Did the purpose of setting up Small Finance Banks (SFBs) in India include supplying credit to small business units?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Small Finance Banks > p. 189
Presence: 5/5
“Small Finance Banks (SFBs) are SCBs that lend to small business units, small and marginal farmers, micro and small industries, unorganized sector entities, etc.”
Why this source?
  • Explicitly states SFBs are scheduled commercial banks that lend to small business units.
  • Lists small business units alongside other target borrowers (small/marginal farmers, micro/small industries), directly matching the statement.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 21. Payment Banks: > p. 87
Presence: 5/5
“2015, RBI granted license to 10 applicants for Small Finance Banks which is a step in the direction of furthering the financial inclusion.• The small finance banks shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities.• There will not be any restriction in the area of operations of small finance banks.• The small finance banks will be required to extend 75% of its total credit to the sectors eligible for classification as priority sector lending (PSL) by the RBI.• At least 50% of its loan portfolio should constitute loans of up to Rs25 lakhs• Both payment banks and small finance banks are niche or differentiated banks i.e., specialized in certain banking functions and not universal.”
Why this source?
  • Specifies SFBs primarily undertake lending to unserved/underserved sections including small business units.
  • Provides policy context (role in financial inclusion and lending focus), reinforcing purpose.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > 7.54 Indian Economy > p. 240
Presence: 4/5
“Recently, KCC facility has been extended also for animal husbandry and fisheries. • Small Finance Banks (SFBs) and Payments Banks were given licences in 2015. It was 8. done to promote small savings accounts, remittance services and credit facility for migrant labourers, small and marginal farmers, micro and small industries and unorganized sector entities.• 9. India Post Payments Bank (IPPB) was launched in 2018. There are over 1.55 lakh post offices, and more than 3 lakh postmen and Grameen Dak Sewaks that are deepening financial inclusion.”
Why this source?
  • Notes SFB licences were given to promote credit facilities for small/marginal farmers, micro and small industries and unorganised sector — groups that include small business units.
  • Supports the broader objective of SFBs to expand credit to smaller economic actors.
Statement 2
Did the purpose of setting up Small Finance Banks (SFBs) in India include supplying credit to small and marginal farmers?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Small Finance Banks > p. 189
Presence: 5/5
“Small Finance Banks (SFBs) are SCBs that lend to small business units, small and marginal farmers, micro and small industries, unorganized sector entities, etc.”
Why this source?
  • Explicitly defines SFBs as banks that lend to 'small and marginal farmers' among other groups.
  • Direct statement of lending target groups makes inclusion unambiguous.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 21. Payment Banks: > p. 87
Presence: 5/5
“2015, RBI granted license to 10 applicants for Small Finance Banks which is a step in the direction of furthering the financial inclusion.• The small finance banks shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities.• There will not be any restriction in the area of operations of small finance banks.• The small finance banks will be required to extend 75% of its total credit to the sectors eligible for classification as priority sector lending (PSL) by the RBI.• At least 50% of its loan portfolio should constitute loans of up to Rs25 lakhs• Both payment banks and small finance banks are niche or differentiated banks i.e., specialized in certain banking functions and not universal.”
Why this source?
  • States SFBs shall lend to unserved/underserved sections including 'small and marginal farmers'.
  • Specifies SFBs' role in furthering financial inclusion and priority-sector lending quotas, reinforcing their purpose.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > 7.54 Indian Economy > p. 240
Presence: 4/5
“Recently, KCC facility has been extended also for animal husbandry and fisheries. • Small Finance Banks (SFBs) and Payments Banks were given licences in 2015. It was 8. done to promote small savings accounts, remittance services and credit facility for migrant labourers, small and marginal farmers, micro and small industries and unorganized sector entities.• 9. India Post Payments Bank (IPPB) was launched in 2018. There are over 1.55 lakh post offices, and more than 3 lakh postmen and Grameen Dak Sewaks that are deepening financial inclusion.”
Why this source?
  • Notes that SFB licences were given to promote credit facilities for 'small and marginal farmers'.
  • Places SFBs in the broader policy aim of promoting small-savings and credit access for vulnerable groups.
Statement 3
Did the purpose of setting up Small Finance Banks (SFBs) in India include encouraging young entrepreneurs to set up businesses, particularly in rural areas?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 4/5
"The objectives of setting up of small finance banks will be for furthering financial inclusion by (i) provision of savings vehicles primarily to unserved and underserved sections of the population, and (ii) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities"
Why this source?
  • Explicitly states the objectives of SFBs include supplying credit to small business units, small and marginal farmers, micro and small industries and other unorganised sector entities — which supports encouraging business creation.
  • The objective is framed as furthering financial inclusion, implying focus on underserved (often rural) populations.
  • Passage does not specifically mention 'young' entrepreneurs; it refers generally to small business units and underserved sections.
Web source
Presence: 4/5
"to give a thrust to the supply of credit to micro and small enterprises, agriculture and banking services in unbanked and under-banked regions in the country, Reserve Bank decided to licence new "Small Finance Banks (SFBs)""
Why this source?
  • RBI text links licensing of SFBs to giving 'a thrust to the supply of credit to micro and small enterprises, agriculture and banking services in unbanked and under-banked regions', supporting the rural and small-business focus.
  • This supports the idea that SFBs were intended to encourage business activity in underbanked/rural areas through credit availability.
  • Does not mention 'young' entrepreneurs specifically.
Web source
Presence: 4/5
"SFBs are niche banks that provide financial services to small businesses, marginal farmers, and low-income households. ... Outreach to Rural Areas: SFBs have expanded their presence in"
Why this source?
  • Describes SFBs as niche banks providing financial services to small businesses, marginal farmers, and low-income households and notes 'Outreach to Rural Areas', supporting rural encouragement of business activity.
  • Indicates SFBs operate primarily in rural and semi-urban areas, aligning with the 'particularly in rural areas' part of the statement.
  • Again, no specific reference to 'young' entrepreneurs.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 21. Payment Banks: > p. 87
Strength: 5/5
“2015, RBI granted license to 10 applicants for Small Finance Banks which is a step in the direction of furthering the financial inclusion.• The small finance banks shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities.• There will not be any restriction in the area of operations of small finance banks.• The small finance banks will be required to extend 75% of its total credit to the sectors eligible for classification as priority sector lending (PSL) by the RBI.• At least 50% of its loan portfolio should constitute loans of up to Rs25 lakhs• Both payment banks and small finance banks are niche or differentiated banks i.e., specialized in certain banking functions and not universal.”
Why relevant

Explicit description that SFBs are to lend to unserved/underserved sections including small business units and small and marginal farmers, with priority-sector lending targets.

How to extend

A student could infer that credit focus on small business units might be extended to support new (young) entrepreneurs in rural areas by checking local credit uptake and PSL-directed lending patterns.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Small Finance Banks > p. 189
Strength: 4/5
“Small Finance Banks (SFBs) are SCBs that lend to small business units, small and marginal farmers, micro and small industries, unorganized sector entities, etc.”
Why relevant

Defines SFBs as banks that lend to small business units, micro and small industries, and unorganized sector entities—groups that include small/rural entrepreneurs.

How to extend

One could combine this definition with demographic maps of rural entrepreneurship to assess whether SFB lending targets coincide with young rural start-ups.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > 7.54 Indian Economy > p. 240
Strength: 4/5
“Recently, KCC facility has been extended also for animal husbandry and fisheries. • Small Finance Banks (SFBs) and Payments Banks were given licences in 2015. It was 8. done to promote small savings accounts, remittance services and credit facility for migrant labourers, small and marginal farmers, micro and small industries and unorganized sector entities.• 9. India Post Payments Bank (IPPB) was launched in 2018. There are over 1.55 lakh post offices, and more than 3 lakh postmen and Grameen Dak Sewaks that are deepening financial inclusion.”
Why relevant

States that SFB licences (2015) aimed to promote small savings, remittances and credit for migrant labourers, small and marginal farmers, micro and small industries and unorganized sector entities.

How to extend

A student might use this policy intent plus data on where SFB branches were opened to judge whether they reach rural young entrepreneurs.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 16. MUDRA Bank: > p. 84
Strength: 4/5
“Pending enactment of an act for MUDRA Bank, a Non-Banking Finance Company as MUDRA Ltd has been set up as a subsidiary of SIDBI.• The purpose of MUDRA is to provide funding to the non-corporate (informal sector) small business sector such as small manufacturing units, shopkeepers, fruits and vegetable sellers, hair salons, beauty parlours, truck operators, hawkers, artisans in rural and urban areas with financing requirements of up to Rs 10 lakhs.• MUDRA would be responsible for refinancing all Last Mile Financiers such as Micro Financial Institutions, NBFCs, Societies, Trusts, Companies, Co-operative Societies, SFBs, Scheduled Commercial Banks and RRBs which are in the business of lending to micro/small business entities engaged in manufacturing, trading and services activities (Refinancing means MUDRA loans will be available through Banks/NBFCs/MFIs and not direct lending).• MUDRA loans are available in three categories.”
Why relevant

Describes MUDRA's role in funding non-corporate small business sector (including rural artisans) and states SFBs can be 'last mile financiers'—linking SFBs to financing of small/rural enterprises.

How to extend

Using the MUDRA–SFB link, one could examine whether SFBs channel MUDRA-style lending to nascent entrepreneurs in rural areas.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 7: Indian Economy after 2014 > 7.8 Start-ups and Policy Enablers for Innovation > p. 239
Strength: 3/5
“• Stand Up India: It is aimed at promoting entrepreneurship and job creation at the grassroots level, especially keeping in mind the SCs/STs and women• Start Up India: Aimed at promoting bank financing for startup ventures to boost entrepreneurship and encourage job creation. Rural India's version of Startup India has been named Deen Dayal Upadhyaya Swaniyojan Yojana• Atal Innovation Mission (AIM): Govt's flagship initiative to promote a culture of innovation and entrepreneurship in the country.”
Why relevant

Lists government schemes (Stand Up India, Start Up India) aimed at promoting entrepreneurship at grassroots level—shows a broader policy environment encouraging rural entrepreneurship.

How to extend

A student could combine this policy context with the SFB mandate to test if SFBs were expected to complement those entrepreneurship schemes in rural areas.

Pattern takeaway: UPSC tests the precision of regulatory definitions. If the RBI notification says 'Small Business Units', they will test if you can distinguish that from 'Young Entrepreneurs'. Precision > Generalization.
How you should have studied
  1. [THE VERDICT]: Trap (Statement 3). Source: Nitin Singhania/Vivek Singh (Chapter on Banking). The books explicitly list 'small business units' and 'farmers' but exclude age-specific groups.
  2. [THE CONCEPTUAL TRIGGER]: Financial Inclusion & Differentiated Banking (Small Finance Banks vs. Payment Banks).
  3. [THE HORIZONTAL EXPANSION]: 1. PSL Target: SFBs must lend 75% to Priority Sectors (vs 40% for Universal Banks). 2. Loan Size: 50% of loan portfolio must be up to ₹25 Lakhs. 3. FDI Limit: 74% (Private route). 4. Capital Req: ₹200 Cr (On-tap licensing). 5. CRR/SLR: Fully applicable.
  4. [THE STRATEGIC METACOGNITION]: Distinguish between an *Institution's Mandate* (Sectoral: Farmers, MSMEs) and a *Government Scheme* (Demographic: Young, Women, SC/ST). SFBs are banking structures targeting economic sectors. Schemes (like Stand-Up India) target demographics. Statement 3 conflated the two.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Primary objective of Small Finance Banks (SFBs)
💡 The insight

Multiple references state SFBs were created to lend to small business units and other underserved small borrowers.

High-yield for banking & financial inclusion questions: explains why SFBs differ from universal banks and ties into policy on credit access for MSMEs and rural actors. Mastering this helps answer questions on bank classifications, targeted lending, and financial inclusion measures.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Small Finance Banks > p. 189
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 21. Payment Banks: > p. 87
🔗 Anchor: "Did the purpose of setting up Small Finance Banks (SFBs) in India include supply..."
📌 Adjacent topic to master
S1
👉 Priority Sector Lending (PSL) obligations for SFBs
💡 The insight

Evidence mentions SFB lending focus and PSL-related requirements (e.g., lending quotas and loan-size norms).

Important for questions on regulatory design and bank mandates: shows how RBI uses PSL to steer credit to priority segments and how SFBs are structured to meet those goals. Links to topics on RBI regulations and sectoral credit delivery.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 21. Payment Banks: > p. 87
🔗 Anchor: "Did the purpose of setting up Small Finance Banks (SFBs) in India include supply..."
📌 Adjacent topic to master
S1
👉 SFBs and last-mile/microfinance linkages (MUDRA & microenterprises)
💡 The insight

References connect SFBs with lending to micro/small enterprises and mention MUDRA’s role in refinancing last-mile financiers including SFBs.

Useful for questions on enterprise finance ecosystems: explains institutional linkages (MUDRA, MFIs, SFBs) for supplying credit to micro and small business units. Helps in answering policy design and institutional roles in MSME financing.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 16. MUDRA Bank: > p. 84
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > MUDRA Bank > p. 183
🔗 Anchor: "Did the purpose of setting up Small Finance Banks (SFBs) in India include supply..."
📌 Adjacent topic to master
S2
👉 Mandated lending targets of Small Finance Banks (SFBs)
💡 The insight

References show SFBs were established with explicit lending purposes (to small/marginal farmers and other underserved groups).

High-yield for UPSC: understanding objectives and regulatory design of niche banks helps answer questions on financial inclusion and banking reforms. Connects to topics on priority sector lending, rural credit and RBI licensing policy. Enables answers on 'why' and 'how' SFBs differ from universal banks and their role in agrarian finance.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 21. Payment Banks: > p. 87
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Small Finance Banks > p. 189
🔗 Anchor: "Did the purpose of setting up Small Finance Banks (SFBs) in India include supply..."
📌 Adjacent topic to master
S2
👉 SFBs as a tool for financial inclusion
💡 The insight

Evidence places SFBs alongside payment banks as instruments to deepen small-savings and credit access for migrants, small businesses and farmers.

Important for essays/answers on financial inclusion policies and differentiated banking models; links to schemes and institutions (payments banks, post office banking). Helps frame policy evaluation and comparative questions on inclusive finance.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > 7.54 Indian Economy > p. 240
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 21. Payment Banks: > p. 87
🔗 Anchor: "Did the purpose of setting up Small Finance Banks (SFBs) in India include supply..."
📌 Adjacent topic to master
S2
👉 Priority sector lending focus in rural/agricultural credit
💡 The insight

References reference SFBs' credit being directed to priority sectors and small/marginal farmers as a target.

Relevant to questions on agricultural finance, RBI's PSL framework and measures to improve credit flow to small farmers. Useful for linking institutional reforms to rural development outcomes and for policy critique.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 21. Payment Banks: > p. 87
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Small Finance Banks > p. 189
🔗 Anchor: "Did the purpose of setting up Small Finance Banks (SFBs) in India include supply..."
📌 Adjacent topic to master
S3
👉 Objectives of Small Finance Banks (SFBs)
💡 The insight

References define SFBs as banks created to lend to small business units, small and marginal farmers, micro and small industries and unorganized sector entities — the core purpose relevant to the statement.

High-yield for UPSC: understanding SFB objectives helps answer questions on banking-sector reforms and targeted credit delivery. It links to topics on MSME finance, rural credit and financial inclusion and enables analysis of whether policy aims explicitly include entrepreneurship promotion.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > Small Finance Banks > p. 189
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 21. Payment Banks: > p. 87
🔗 Anchor: "Did the purpose of setting up Small Finance Banks (SFBs) in India include encour..."
🌑 The Hidden Trap

The '75% PSL Rule'. While Universal Banks have a 40% Priority Sector Lending target, SFBs are mandated to lend 75% of their Adjusted Net Bank Credit to priority sectors. This is the single biggest regulatory differentiator likely to be tested next.

⚡ Elimination Cheat Code

The 'Scheme vs. Structure' Heuristic. SFBs are a banking *structure*, not a welfare *scheme*. Structures usually have economic targets (Small Units, Farmers). Schemes (like Stand-Up India) have demographic targets (Young, Women, SC/ST). Statement 3 uses 'Young Entrepreneurs' (demographic), which signals a Scheme, not a Bank mandate. Eliminate 3.

🔗 Mains Connection

Mains GS-3 (Inclusive Growth): SFBs represent the shift from 'Class Banking' to 'Mass Banking'. Cite SFBs as the structural solution to the 'Missing Middle' credit problem in Indian industry, complementing schemes like MUDRA.

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SIMILAR QUESTIONS

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Which of the following statements regarding Regional Rural Banks (RRB) in India is/are correct ? 1. The basic aim of setting up the RRBs is to develop rural economy. 2. The area of RRBs is limited to a specific region comprising one or more districts. 3. RRBs are sponsored by Commercial Banks. Select the correct answer using the code given below :

IAS · 2004 · Q47 Relevance score: -1.59

Consider the following statements: 1. The National Housing Bank, the apex institution of housing finance in India, was set up as a wholly- owned subsidiary of the Reserve Bank of India. 2. The Small Industries Development Bank of India was established as a wholly-owned subsidiary of the Industrial Development Bank of India. Which of the statements given above is/ are correct?

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In the context of Indian economy, which of the following is/are the purpose/purposes of 'Statutory Reserve Requirements'? 1. To enable the Central Bank to control the amount of advances the banks can create 2. To make the people's deposits with banks safe and liquid 3. To prevent the commercial banks from making excessive profits 4. To force the banks to have sufficient vault cash to meet their day-to-day requirements Select the correct answer using the code given below.

IAS · 2020 · Q31 Relevance score: -2.25

In India, which of the following can be considered as public investment in agriculture ? 1. Fixing Minimum Support Price for agricultural produce of all crops 2. Computerization of Primary Agricultural Credit Societies 3. Social Capital development 4. Free electricity supply to farmers 5. Waiver of agricultural loans by the banking system 6. Setting up of cold storage facilities by the governments Select the correct answer using the code given below :

IAS · 2016 · Q4 Relevance score: -2.74

The establishment of 'Payment Banks' is being allowed in India to promote financial inclusion. Which of the following statements is/are correct in this context? 1. Mobile telephone companies and supermarket chains that are owned and controlled, by residents are eligible to be promoters of Payment Banks. 2. Payment Banks can issue both credit cards and debit cards. 3. Payment Banks cannot undertake lending activities. Select the correct answer using the code given below.