Beyond mfin and deposits: The next chapter for small finance banks

Small finance banks must diversify beyond microfinance and embrace digital innovation to remain relevant as customers' financial needs become more sophisticated

For much of the past decade, small finance banks (SFBs) have been synonymous with financial inclusion. Their success was built on a simple but powerful proposition — mobilising deposits and extending credit to customer segments that were often underserved by the formal financial system.

 

Yet the operating environment today is markedly different from the one in which SFBs were conceived. Customer aspirations have evolved, digital adoption has accelerated, and the financial sector has become increasingly interconnected. Recent stress in parts of the microfinance ecosystem has also reinforced the importance of building resilient and diversified business models.

 

As a result, SFBs are entering a new phase of evolution. The question is no longer how they can expand access to finance, but how they can remain relevant to customers whose financial needs are becoming more diverse and sophisticated. The future of SFBs will likely be defined by their ability to evolve from inclusion-focused lenders into diversified, technology-enabled financial institutions.

 

This does not imply moving away from financial inclusion. On the contrary, the strongest SFBs will continue to leverage the deep customer understanding developed through years of serving underserved communities. What will change is the breadth of solutions they provide.

  Traditionally, many customers entered the banking system through a single credit product. Today, there is a growing opportunity to support them across multiple stages of their financial journey. A customer who initially seeks access to basic credit may subsequently require working capital, a vehicle loan, housing finance, savings products, insurance solutions, payments capabilities and digital banking services.

 

Consequently, many SFBs are diversifying beyond traditional microfinance into secured retail lending, affordable housing finance, MSME (micro, small and medium enterprises)  lending, vehicle finance and other emerging credit segments. Diversification is often viewed through the lens of growth, but it is equally important from a resilience perspective. A balanced portfolio enables institutions to navigate sector-specific challenges while continuing to support customers across economic cycles.

 

At the same time, the liability side of the business is undergoing a significant transformation. Historically, deposit mobilisation relied heavily on branch-led acquisition and local community engagement. While physical networks will remain important, the future liability franchise is likely to be increasingly digital. Across the sector, digital deposits are emerging as a meaningful contributor to incremental deposit growth, supported by seamless onboarding journeys, improved customer experience and the increasing comfort of customers with digital banking channels.

 

India’s digital public infrastructure — including Aadhaar, UPI, account aggregation and real-time payments — has fundamentally altered how financial services can be delivered. For SFBs, these platforms create opportunities to serve customers at lower cost, improve operating efficiency and expand reach beyond traditional geographic boundaries.

 

Perhaps more importantly, technology is enabling institutions to rethink product design itself. New-age solutions such as fixed deposit-backed secured credit cards, digital savings products and credit-on-UPI illustrate how financial access can be expanded responsibly, while maintaining prudent risk frameworks. Such innovations have the potential to bring more customers into the formal credit ecosystem and help them build sustainable financial histories.

 

The next generation of SFBs is unlikely to build every capability in-house. Instead, collaboration with fintechs, technology providers and ecosystem partners will enable faster innovation, better customer experiences and more efficient service delivery. The sector’s evolution is also aligned with broader regulatory priorities. Regulators have consistently emphasised responsible lending, customer protection, governance and sustainable growth. Diversification, technology adoption and stronger liability franchises are, therefore, not only commercial priorities but also important building blocks for long-term stability.

 

Looking ahead, the institutions that succeed will be those that strike the right balance between purpose and scale. The first decade of SFBs was about bringing customers into the formal financial system. The next decade will be about helping them grow within it. As our economy becomes more digital, formal and aspirational, SFBs have an opportunity to evolve from specialised inclusion-focused lenders into full-service financial partners.

The writer is CEO & MD of Suryoday SFB