February 21, 2017 No Comment. Posted in Financial Literacy

Financial Inclusion of every citizen is the main reason to introduce small bank and payment bank in Indian Banking Industry by RBI. By the help of Small banks and Payment banks, we can easily achieve complete financial inclusion and can help to all the citizens of India to contribute in the main stream of Indian Economy.

There are many norms that are similar to Payment Banks & Small Banks and also there are certain untold stories to understand the difference between Payment & Small Bank.

PAYMENT BANKS

Like any other banks a Payment Bank operates on a smaller scale without involving any credit risks. Or simply, it can carry most of the banking operations but can’t advance loans or issue credit cards as they are not empowered to carry out lending activities. It can accept deposits, offer remittance services, mobile payments/transfers/purchases and other banking services like ATM/debit cards, net banking and third party fund transfers.

In September 2013, the Reserve Bank of India constituted a committee to study ‘Comprehensive financial services for small businesses and low income households’. The objective of the committee was to propose measures for achieving financial inclusion and increased access to financial services. The key suggestions of the committee were to introduce specialized banks or ‘payments bank’ to cater to the lower income groups and small businesses.

The payments banks are given the status of scheduled banks under the section 42 (6) (a) of the Reserve Bank of India Act, 1934. Companies used words ‘Payment Banks’ in their name to differentiate it from other banks.

RBI’s main objective to open payments banks is to serve the need of transaction and savings account in rural areas. In this way, both macroeconomic benefits, as well as microeconomic benefits, will be served at a broad level to its customers.

The primary objectives of RBI to develop such banks are:

  • Small savings accounts initially are restricted to holding a maximum balance of Rs. 100,000 per individual customer, which might get increased further as per RBI regulations.
  • To provide payments/remittance services to migrant labour workforce, low-income households, small businesses, other unorganized sectors.

The payments bank can set up their outlets such as branches, Automated Teller Machines (ATMs), Business Correspondents (BCs), etc. which will be regulated by the Banking Regulation Act, 1949.

The services which are considered for regulations are:

Small deposit accounts: Demand deposits and savings bank deposits from any individuals, entities and other small firms will be accepted. However, NRI deposits will not be accepted. The eligible deposits mobilized by the payments bank would be insured to a holding of maximum balance of Rs. 100,000 per individual customer. The payments bank also needs to comply with its own KYC norms.

Issuance of ATM / Debit Cards: Payments banks, however, cannot issue credit cards as per the RBI guidelines as they cannot deal with lending businesses.

Payments and remittance services: These banks can use any channel for making or transferring of payments through branches, Automated Teller Machines (ATMs), Business Correspondents (BC), mobile banking and can be accessed through point of sales terminals adhering to the terms and conditions that card payments network should be authorized with debit card payments other than credit card, regulated under the PSS Act. Through payments bank app you can pay utility bill payments etc.

Cross-border remittance services: The banks can handle cross-border remittance transactions if they are in nature of personal payments/remittances on the current account. Prior approval will be taken from RBI in the application before providing such kind of services.

Internet Banking: The RBI is also open to payments bank offering Internet banking services. The payments bank is expected to offer low-cost banking solutions. Such a bank should ensure that it has all systems enabled so that in the third party service providers, any kind of fraudulent activities if occurs, can be controlled to enable offering transactional services on the internet. The payments bank can accept remittances to be sent to or receive payments from multiple banks under a payment mechanism approved by RBI, which are RTGS / NEFT / IMPS.

Financial Services: Payments banks can further deal with the non-risk sharing simple financial services activities, including mutual fund unit’s distribution, insurance solutions products, pension solutions products, etc adhering to terms and conditions imposed by RBI.

STATISTICAL ANALYSIS OF PAYMENT BANKS

A payment bank is a novel concept inspired by many other such models which have been successful. One such example is M-Pesa (‘M’ for mobile and ‘pesa’ is Swahili for money), the mobile payment service which was first launched by Vodafone in 2007. An estimated amount of USD 1 billion gets transferred every month in Kenya.  In our country, we have around 1033.20 million mobile subscribers. This number simply outnumbers the bank accounts. Thus, financial inclusion is the most likely outcome of such banks. Further, the large number of mobile subscribers bring an excellent business opportunity, which has lured large telecom companies.

RBI has given an approval to 11 organisations to set up payment banks in 2015, out of which 8 have opted for licencing, which are as under.

  1. Aditya Birla Nuvo
  2. Airtel M Commerce Services
  3. Department of Posts
  4. FINO PayTech
  5. National Securities Depository
  6. Reliance Industries
  7. Paytm
  8. Vodafone M-Pesa

Payment Banks cannot provide the full fledged services like a regular bank and their services are limited.

SMALL FINANCE BANKS

 

Small financial banks are to provide basic banking services for the purpose of financial inclusion and boosting saving habits among the un-served or under-served section of the society. Small Banks can accept all types of deposits like a commercial bank (savings, current, fixed deposits, recurring deposits etc) as well as loan disbursements. The eligibility to setup a Small Bank requires a resident individual with around 10 yrs of experience in Banking & Finance, companies or societies, NBFC’s, Microfinance and local area Banks.

Small banks cannot give depositors money as loan to others ( big industries) , but for small area of operation and the target for small banks are MSME’s, farmers, business man and the unorganised sector. Their operations are limited to small area but they can be allowed to expand its area of operations beyond contiguous districts in one or more states with reasonable geographical proximity.

These banks are supposed to meet RBI’s norms and regulations regarding risk management. They have to meet CRR ( Cash Reserved Ratio) & SLR ( Statutory Liquidity Ratio) requirements, like any other commercial bank. The maximum loan and investment amount is restricted to a limited exposure to single/ group borrowers/ issuers to 15% of the capital funds. They are more like the cooperative banks. It is mandatory to open 25% of branch in unbanked areas.

RBI issued guidelines to 10 Small Banks’ applicants. The selected Applicants are as follows :

  • Au Financiers (India) Limited, Jaipur
  • Capital Local Area Bank Limited, Jalandhar
  • Disha Microfin Private Limited, Ahmedabad
  • Equitas Holdings P Limited, Chennai
  • ESAF Microfinance and Investments Private Limited, Chennai
  • Janalakshmi Financial Services Private Limited, Bengaluru
  • RGVN (North East) Microfinance Limited, Guwahati
  • Suryoday Micro Finance Private Limited, Navi Mumbai
  • Ujjivan Financial Services Private Limited, Bengaluru
  • Utkarsh Micro Finance Private Limited, Varanasi.

Both the Banks are aimed at providing banking services to the unbanked. Both the Banks are for financial inclusion, providing banking services to the people (especially rural areas) at low cost.

A QUICK OVERVIEW OF THE DIFFERENTIATION

SMALL FINANCE BANKS                                                                    PAYMENT BANK

ELIGIBILITY

  • Professionals with 10 years in financial services or promoter group with 5 year track record. Banking and finance companies and societies owned and controlled by residents, existing NBFCs, micro-finance institutions and local area banks owned and controlled by residents.
  • Individuals or professionals with necessary experience and eligibility, existing NBFCs, corporate banking correspondents, mobile companies, supermarket chains, real estate co-ops and corporate entities  Card Issuers, Finance Companies, Business Correspondents, Telecom Companies, Retailers etc.

CAPITAL REQUIREMENT

  • Rs. 100 Crore Equity Capital
  • Rs. 100 Crore Equity Capital

SCOPE OF ACTIVITY

  • Providing basic banking facilities to poor and small businessman.
  • No restriction on operational area.
  • At least 50% of its loan portfolio should constitute loans and advances of upto Rs.25 Lakh
  • Accept deposits, issue debit cards, remittance services. Cannot issue credit cards.
  • Payment Bank can not undertake Lending activities. They should not offer loans.
  • Can distribute non-risk simple financial products such as mutual funds and insurance products

PROMOTER  CONTRIBUTION

  • Promoter’s initial contribution should be 40% and can be lowered to 26% in 12 years.
  • Promoters should retain a 40% stake for first 5 yrs.