Last week, when the Reserve Bank of India (RBI) granted in‑principle approval to Fino Payments Bank to convert into a Small Finance Bank (SFB), it quietly began a shift in the Indian banking sector.
Fino would be the first such transition by a payments bank under the RBI’s updated SFB licensing framework. It would mark a beginning for more players entering the market.
Under the apex bank’s 2025 SFB Licensing Guidelines, payments banks that are resident‑controlled and have completed at least five years of operations can apply for conversion, subject to “fit and proper” criteria and capital, governance and business‑plan conditions.
Fino met these conditions, and its application was assessed under the procedure laid down in the guidelines, the RBI noted.
Once fully converted, Fino would move from a narrow “payments‑only” model to a full SFB, allowed to accept regular bank deposits and extend its own loans to individuals, micro entrepreneurs and small businesses, subject to prudential norms.
Current rules allow SFBs to engage in basic banking (deposits and lending) with a clear focus on “unserved and underserved” segments such as small business units, micro and small industries, small and marginal farmers and the informal sector.
At least 25 per cent of SFB branches must be in unbanked rural centres, pushing these banks toward deeper Tier‑3–6 and rural penetration, according to reports.
Fino brought an asset‑light, tech‑first franchise with about 18 lakh merchant points that it already uses as “quasi‑branches” in rural and semi‑urban India. Its management has indicated that, post‑conversion, this network will be leveraged to lend to “lower‑end SMEs” while still keeping a strong focus on small-ticket, mass‑market banking.
RBI’s guidelines require SFBs to direct a large share of lending to priority sectors such as agriculture and small enterprises, though the effective target has recently been eased from 75 per cent to 60 per cent of adjusted net bank credit, giving these banks more flexibility to balance risk and returns while still supporting inclusion.
This means that Fino must build a loan book tilted towards MSMEs and other priority clients, but it will have more room than earlier SFBs to calibrate portfolio mix between secured products like loans against property and higher‑yield small‑ticket credit.
The others, public sector banks, big private banks, NBFCs and other larger incumbents in the MSME space will likely face competition at the micro and lower‑SME end from players like Fino, particularly in underserved geographies where the latter’s merchant network is already entrenched.
But industry analysts point out that the MSME pie itself is expanding, with MSME credit’s share in total bank lending reaching new highs. Other Fino peers like Airtel Payments Bank could use this opportunity to convert to SMBs as well.