What is the Difference Between Small Finance Banks and Commercial Banks? Learn Where to Keep Money Safe

March 30, 2025 By: Nisha Chawla

When it comes to saving money, investing, or getting a loan, choosing the right bank is crucial. In India, banks are mainly divided into different categories, including commercial banks and small finance banks. Both serve different purposes and have their own set of benefits. But do you know how they differ and where you should keep your money for better security and returns? Let’s understand in simple terms.

What Are Commercial Banks?

Commercial banks are the most common type of banks in India. These banks provide various financial services, such as savings accounts, fixed deposits, loans, and investment options. They serve both individuals and businesses and are regulated by the Reserve Bank of India (RBI).

Types of Commercial Banks

1. Public Sector Banks: These banks are owned by the government (e.g., State Bank of India, Punjab National Bank, Bank of Baroda).
2. Private Sector Banks: These banks are owned by private companies or individuals (e.g., HDFC Bank, ICICI Bank, Axis Bank).
3. Foreign Banks: These banks are based in other countries but operate in India (e.g., Citibank, HSBC, Standard Chartered).
4. Regional Rural Banks (RRBs): These banks serve rural areas and provide financial support to farmers and small businesses.

Key Features of Commercial Banks

• Offer all banking services, including deposits, loans, credit cards, and investments.
• Provide higher loan amounts for businesses and individuals.
• Have a wide network of branches and ATMs across the country.
• Regulated by RBI and offer Deposit Insurance up to ₹5 lakh per depositor.

What Are Small Finance Banks?

Small Finance Banks (SFBs) are a type of specialized bank set up to provide financial services to low-income individuals, small businesses, and underserved sectors. These banks focus on rural and semi-urban areas where people have limited access to banking services.

Examples of Small Finance Banks in India

• AU Small Finance Bank
• Ujjivan Small Finance Bank
• Jana Small Finance Bank
• ESAF Small Finance Bank

Key Features of Small Finance Banks

• Provide basic banking services like savings and fixed deposits.
• Offer small-ticket loans to small businesses and farmers.
• Have limited branch networks but focus on digital banking.
• Offer slightly higher interest rates on savings and fixed deposits.
• Also regulated by RBI and provide Deposit Insurance up to ₹5 lakh per depositor.

Key Differences Between Small Finance Banks and Commercial Banks

Feature	Commercial Banks	Small Finance Banks
Target Customers	General public, businesses, corporates	Small businesses, low-income groups, rural population
Loan Services	Large loans for industries, home loans, business loans	Small-ticket loans for small businesses and individuals
Branch Network	Wide network across the country	Limited branches, mostly in rural and semi-urban areas
Deposit Safety	Regulated by RBI, deposits insured up to ₹5 lakh	Regulated by RBI, deposits insured up to ₹5 lakh
Interest Rates on Savings	Moderate (3-4% on savings)	Higher (5-7% on savings)
Technology & Digital Banking	Well-developed mobile and internet banking services	Digital banking is improving but still growing
Investment Options	Mutual funds, stock market investment, wealth management	Limited investment options

Where Should You Keep Your Money?

If you are wondering where to keep your money safe, here are some things to consider:

1. If You Need Stability & Full Banking Services

• Choose a commercial bank.
• Best for salaried individuals, businesses, and those who need loans or credit cards.
• Offers multiple banking services, investment options, and financial planning.

2. If You Want Higher Interest on Savings

• Small finance banks offer higher interest rates on savings and fixed deposits.
• Ideal for those who want to grow their savings faster.

3. If You Live in a Rural or Semi-Urban Area

• Small finance banks provide easy access to banking services in remote areas.
• Best for farmers, small businesses, and self-employed individuals.

4. If You Want Strong Digital Banking Services

• Commercial banks have better digital infrastructure for online transactions and mobile banking.
• Suitable for people who rely on digital payments and online banking.

Final Thoughts

Both small finance banks and commercial banks play an important role in the Indian banking system. If you want a trusted bank with a wide network and full banking services, a commercial bank is the best choice. However, if you are looking for higher interest rates on savings and simple banking solutions, then small finance banks can be a good option.

No matter which bank you choose, make sure to check its RBI regulations, deposit insurance, and banking services before making a decision. A well-planned financial strategy will help you get the best returns while keeping your money safe.