Small Finance Bank and Payment Banks By Thakur Vikas Tomar

Payments banks
The Committee on Comprehensive Financial Services for Small Businesses and Low Income
Households was set up by the RBI in Sep 2013 under the chairmanship of Nachiket Mor
recommended creation of Payment Banks.
On 19th august 2015,RBI gave in-principle license to 11 entities to launch Payment Bank out of 41
applicants .
Payment banks are non-full service banks, whose main objective is to accelerate financial Inclusion.
Capital requirement: The minimum paid-up equity capital for payments banks is Rs. 100 crore.
Promoters contribution: The promoters minimum initial contribution to the paid- up equity capital of
such payments bank shall at least be 40% for the first five years from the commencement of its
business.
Foreign shareholding: The foreign shareholding in the payments bank would be as per the Foreign
Direct
Investment (FDI) policy for private sector banks as amended from time to time.
Cash Reserve Ratio (CRR): Cash Reserve Ratio (CRR) with the Reserve Bank on its outside demand and
time liabilities.
Statutory Liquidity Ratio (SLR): Invest minimum 75% of its demand deposit balances in Statutory
Liquidity
Ratio (SLR) eligible Government securities/treasury bills with maturity up to one year and hold
maximum
25% in current and time/fixed deposits with other scheduled commercial banks for operational
purposes and liquidity management.
Airtel launches India's first payments bank.
India Post Payments Bank is the third entity to receive payments bank permit after Airtel and Paytm.
Activities of Payment Banks:
Payments banks will mainly deal in remittance services and accept deposits of up to
Rs 1 lakh.
They will not lend to customers and will have to deploy their funds in government papers and bank
deposits.
They can accept demand deposits.
They can issue ATM/debit cards but not credit cards.
Distribution of non-risk sharing simple financial products like mutual fund units and insurance
products, etc. is allowed.
Payment banks can offer remittance services, mobile payments/transfers/purchases and
other banking services like ATM/debit cards, net banking and third party fund transfers.

Small Finance Banks

The small finance bank will primarily undertake basic banking activities of acceptance of deposits and
lending to unserved and underserved sections including small business units, small and marginal
farmers, micro and small industries and unorganised sector entities.
In February 2015, RBI released the list of entities which had applied for a small finance bank license.
There were 72 applicants.
 On 17 September 2015, The Reserve Bank of India (RBI) announced that it had given provisional
licenses to 10 entities who would have to convert into Small Finance Banks within one year,8 out of
these 10 entities are microfinance NBFCs reiterating RBIs agenda of financial inclusion.
It was also announced that an external advisory committee headed by Usha Thorat will evaluate the
license applications.
Capital Small Finance Bank, India's first small finance bank. Jalandhar-headquartered bank had been
operating as Capital Local Area Bank since January 2000 with 47 branches in five districts of Punjab.
What they can do:
Take small deposits and disburse loans.
Distribute mutual funds, insurance products and other simple third-party financial products.
Lend 75% of their total adjusted net bank credit to priority sector.
Maximum loan size would be 10% of capital funds to single borrower, 15% to a group.
Minimum 50% of loans should be up to 25 lakhs.
What they cannot do:
Lend to big corporates and groups.
Cannot open branches with prior RBI approval for first five years.
Other financial activities of the promoter must not mingle with the bank.
It cannot set up subsidiaries to undertake non-banking financial services
activities.
Cannot be a business correspondent of any bank.
The guidelines they need to follow:
Promoter must contribute minimum 40% equity capital and should be brought down to 30% in 10
years.
Minimum paid-up capital would be Rs 100 cr.
Capital adequacy ratio should be 15% of risk weighted assets, Tier-I should
be 7.5%.
Foreign shareholding capped at 74% of paid capital, FPIs cannot hold more than 24%.
Priority sector lending requirement of 75% of total adjusted net bank credit.
50% of loans must be up to Rs 25 lakh.

Common Features of Small bank and Payment banks

Minimum capital requirement to apply for license: 100 crores. (For commercial bank license, it
was Rs.500 crores)
Theyll have to comply with the FDI norms like regular commercial banks i.e. 74% FDI only.

A Quick Revision on Difference between Small Finance Bank and Payment Banks

Whats the difference?

Small banks Payment banks
Take deposit only on current account, saving
Can accept all types of deposits like a
account. (CASA)
commercial bank (CASA, FDRD etc.)
Cannot accept fixed deposits (FD)

They can give out depositors
money as loans to other
customers, but small area of
operation.
Theyll be opened under
Companies Act 2013.
Target customers: MSME
businessmen, unorganized workers,
small and marginal farmers.
Focus: Deposit and loans
Who can apply?
MFI, NBFC can convert their
organization into small banks
Even individual with 10 years
experience in bank/cooperative
sector can apply for license.
Large companies cant apply.
Conditions:
25% branches in rural area
50% of the loans be given to
MSME sector.
Can issue Credit card? Nope.
Can issue debit card? Yes.
Can open NRI accounts? Nope
They cant give loans. They can invest
depositors money in Government securities
(G-sec) only.
Although theyre allowed to sell mutual funds,
insurance and pension products, accept utility
bill payments etc. to keep branch operations
profitable.
Target customers: poor, migrants, unorganized
workers wanting to send remittances home.
Focus: Payment/remittances only. Including cross-
border remittances.
Who can apply?
Indian Post
Corporate houses
Telecom companies
Retail chains.
Above people can even launch payment banks
with Joint venture from commercial banks.
Condition:
Maximum balance per customer: Rs.1 lakh
Minimum Leverage ratio 3% i.e. liabilities
should not exceed 33 times of its networth.