India, July 11 -- For decades, millions in rural and small-town India depended on local moneylenders charging steep interest because traditional banks refused borrowers without formal income records or collateral. To bridge this gap, the RBI introduced Small Finance Banks in 2015, requiring them to direct 75% of lending toward underserved groups like farmers, micro businesses, and self-employed workers while expanding formal banking access in neglected regions.

For investors, SFBs matter because higher-risk lending allows them to earn strong margins of 8-9%, far above traditional banks. Those controlling bad loans effectively are benefiting from India's growing push toward formal rural credit.

Before looking at Small Finance Banks, foc...