Small & Payment

Banks

Dr. Teena Shivnani

Introduction

In order to speed up financial inclusion, finance

ministerArun Jaitleysaid in his budget speech
(July,2014) that:

"RBIwill 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 guidelinesfor 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

Apayments bankis a type of non-full service

functionbank of India.
A banklicensed as apayments bankcan 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
undertakeNBFCbusiness.

Objectives of
Payments banks

The main objective of Payments Banks is to

increase financialinclusion (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 Indias 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 Ra
tio
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
(CRR)

Cash

Reserve

Ratio

Invest all its money in Government

securities/Treasury Bills with maturity
up to one year that are recognized
by RBI as eligible securities for

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.

RBIs 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 focusand 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 berestricted to few
districts(near-by) of a state.
Small Banks have to meet RBIs norms and regulations regarding risk
management. They have to meetCRR and SLRrequirements, like any
other commercial bank.

Branch expansion: For the initial three years, prior approval will be

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