Small & Payment Banks

Dr. Teena Shivnani

Introduction• In order to speed up financial inclusion, finance

minister Arun Jaitley said in his budget speech (July,2014) that:

"RBI will create a framework for licensing small banks and other differentiated banks.” These local area banks, payment banks and Small

Banks are expected to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force.

Within a week of the budget, RBI (Reserve Bank of India) had already issued guidelines for licensing Payments and Small Banks.

Cont.…..On (19-Aug-2015) RBI grants in-principle Network Operation Division (NOD) to 11 companies for payments bank license:- 1) National Securities Depository Limited (NSDL), 2) Reliance Industries, 3) Aditya Birla Nuvo, 4) Airtel M Commerce, 5) Department of Posts, 6) Fino Paytech, 7) Tech Mahindra, 8) Vodafone m-pesa, 9) Cholamandalam Distribution services, 10) Pay tm and 11) Sun Pharma.

Payment Bank Meaning

A payments bank is a type of non-full service function bank  of India.

A bank licensed as a payments bank can only receive deposits and provide remittances.

The banks can offer issuance of prepaid payment instruments, internet banking, functioning as business correspondent for other banks.

It cannot carry out lending activities. No credit lending is allowed for Payments Banks.

Payments Banks cannot set up subsidiaries to undertake NBFC business. 

Objectives of Payments banks

The main objective of Payments Banks is to increase financial inclusion (to get more people into the banking system) by providing Small Savings Accounts, Payment or remittance services to low income households / Labour, small businesses etc.

Payments banks will provide basic banking services to people who currently do not have a bank account, including millions of migrant workers. Almost half of India’s population is unbanked.            

RBI Guidelines Eligibility criteria of Applicants – Prepaid payment

instruments issuers, NBFCs, Telecom companies, Supermarket Chains, Corporates etc.,

The minimum capital requirement is Rs 100 crore They cannot issue Credit Cards. Payment Bank can not undertake Lending activities.

They should not offer loans. A Payments bank will be required to invest 75% of

its demand deposits balances in Government Securities (G-Sec) & Treasury Bills.

They have to meet Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio requirements set by RBI.

Operational Details• The Payments Bank will be required to

use the word “Payments” in its name.

• The Payments Bank will be registered as a public limited company under the Companies Act, 2013, and licensed under the Banking Regulation Act, 1949.

• Maintain Cash Reserve Ratio (CRR)

• Invest all its money in Government

securities/Treasury Bills with maturity up to one year that are recognized by RBI as eligible securities for maintenance of Statutory Liquidity Ratio (SLR).

Scope of Activities Acceptance of demand deposits, i.e., current deposits,

and savings bank deposits restricted to holding a maximum balance of Rs. 100,000 per customer.

Payments and remittance services through various channels including branches, BCs and mobile banking Issuance of Pre-Payment Instruments Issue ATM / Debit cards Internet banking Functioning as Business Correspondent (BC) of other banks

– A Payments Bank may choose to become a BC of another bank for credit and other services which it cannot offer.

Small Banks Small banks will be smaller in size and operations

compared with existing commercial banks. They will offer both deposits as well as loan

products. But unlike existing commercial banks, these will be limited to basic products.

Also, they will have operations in limited areas, say in a single state at the initial stage

The objective for these Small Banks is to increase financial inclusion by provision of savings vehicles to under-served and un-served sections of the population, supply of credit to small farmers, micro and small industries, and other unorganized sector entities through high technology-low cost operations.

Reasons for Need of Small Banks

Many people in rural areas lend or deposit their hard-earned money with money lenders and financiers.

Chit funds are also very popular. The main reason for all these things is that they

do not have access to banks.

Small Banks can change this scenario. 

RBI’s Guidelines For Small Banks Eligibility – Professionals with 10 years of experience in banking /

finance / Micro Finance Institutions. The minimum capital requirement is Rs 100 crore (minimum paid-up

equity capital). Local focus and ability to serve smaller customers will be a key criterion

in licensing such banks. The bank shall primarily undertake basic banking activities of accepting

deposits and lending to small farmers, small businesses, micro and small industries, and unorganized sector entities.

It cannot set up subsidiaries to undertake non-banking financial services activities. After the initial stabilization period of five years, and after a review, the RBI may liberalize the scope of activities for Small Banks.

The area of operations would normally be restricted to few districts (near-by) of a state.

Small Banks have to meet RBI’s norms and regulations regarding risk management. They have to meet CRR and SLR requirements, like any other commercial bank.

Branch expansion: For the initial three years, prior approval will be required for Branch Expansion.

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