Differential Banking:

1. Banking institutions which are licensed for providing specific banking of products and
services by RBI.

2. The arrangement of differentiated licenses for various sub parts of the financial division,
for example, Limited Banking License, Commercial Banking License and so forth. A
separated permit will enable a bank to offer items just in select zones.

3. Primary target offering permit to differential banking is to advance money related

consideration and installments. The term differentiated banks demonstrate that they are
not the same as the typical general banks. The banks like SBI, Canara Bank and so forth
can give practically all items and administrations. Then again, these differentiated banks
can give just chosen offerings like credit, deposits, payments and so forth, with RBI
guidelines.

4. Differentiated banks’ permitting was propelled in 2015. These banks are of two kinds
small finance banks and the Payment Banks.

5. They can take part in sub divisions of the financial segment, for example, Commercial
Banking License, Limited Banking License, and so forth. A differentiated permit will
enable a bank to offer items in select verticals only.

6. A few administrative prerequisites for these banks additionally are diverse compared with
the conventional banks. For instance, the Small Finance Banks and Payment Banks ought
to have a base capital of Rs 100 crores. Then again all Universal banks ought to have a
capital of Rs 500 crore. Payment Banks are not allowed to give loans. Small Finance
Banks are supposed to give 75% of the loans for priority sector use.

7. RBI adopted the differentiated banking license policy in order to promote the financial
inclusion in addition to enable the quick payment services by using the new technologies.
8. This structure could now help new banks to focus on the niche lending opportunities and
to get a regulatory treatment which is different from the other banks.
Small Finance Banks (SFBs)
 These niche banks serve and focus on a certain demographic segment
 The objectives for their set up will be to enhance financial inclusion
 SFBs were recommended by the NachiketMor committee..

Scope of activities of SFBs

 These primarily shall undertake the basic banking activities such as acceptance of
deposits and lending focused towards under-served and un-served sections including the
SBUs, small farmers and small industries in addition to un-organized sector entities.
 There won’t be any sort of restriction in these areas of operations.

Criteria for set-up of SFBs

 Professionals/Individuals having ten years of experience in NBFCs, finance, local area

banks, micro finance companies are eligible..
 Minimum paid equity capital for SFBs will be Rs. 100 crore.
 The minimum initial contribution of the promoter to the paid equity capital SFB must be at
least forty per cent. This is gradually brought down to 26% in 12 years from the
commencement of business.
 foreign shareholding has to be as per the FDI policy for the private sector banks
 SFBs are required to extend 75 % of their ANBC to the sectors which are eligible to be
classified as PSL
 SFBs must maintain CRR and SLR as per the specified RBI norms.
 Minimum of 50 % of the loan portfolio has to constitute loans & advances up to 25 lakh
Rupees.
What can Small Finance Banks (SFBs) do?

 Selling the forex to customers.

 Selling pensions, insurance and mutual funds.

What Small Finance Banks can’t do?

 Extension of large loans.

 Floating of subsidiaries
 Dealing in sophisticated products.

Challenges to Small Finance Banks

 Competition with existing public banks & RRBs.

 Cost of deposit mobilization can be greater for the banks because they cover under-served
and rural segment.

Payment Banks

 The goal of setting up payments banks is to enhance financial inclusion by providing

 Payments services to low-income household, migrant labor workforce, small businesses,
and the other un-organized sector entities.
 small savings accounts

Scope of activities

 Accepting demand deposits-They will initially be limited to hold a maximum balance

which is Rs. 100,000/ individual customer.
 Issuing ATM/debit cards-Payments banks cannot issue the credit cards.
 Remittance and Payments services through different channels.
 Business Correspondents of any another bank which is subject to the RBI guidelines.
 Distributing non-risk sharing financial products like insurance and mutual fund units
  The payments bank are not allowed to undertake any lending activities.

Criteria for setting up Payment banks

 Existing non-bank PPI issuers or other entities such as professionals/ individuals ; NBFCs,
BCs, supermarket chains, mobile telephone companies, real sector companies,
cooperatives; which are owned/controlled by the residents;
 promoter groups be ‘proper and fit’ with a good track record of experience or else run the
businesses for a minimum period of five years to be eligible to promote these payments
banks.
 Minimum paid up equity capital required for such small finance banks will be Rs. 100
crore.
 Minimum 75 percent of deposits in the Government bond and the maximum of 25 percent
deposits with any other scheduled commercial banks.
 Minimum initial contribution for the paid-up equity capital for such payments bank will be
at least 40 % in the initial five years from its commencement.
 Highly efficient Customer Grievances Cell in order to handle the customer complaints.
 The operations must be fully driven by network and technology since the beginning and
should also conform to accepted norms and standards.

What can Payment Banks do?

 Internet banking, selling insurance, mutual funds and pensions.

 Having business correspondents & ATMs.
 Bill payment service offering for its customers
 Enabling remittances and transfers from a mobile phone.
 Offer forex services which are at lower charges than bank
 Provide forex cards to the travelers which can be used as debit/ATM card all over India.
 Offer card acceptance mechanism for third parties for instance “Apple Pay”.
What Payment Banks can’t do?

 Offeing credit cards

 Extension of loans
 Handling of cross-border remittances
 Acceptance of NRI deposits

Challenges for payment banks

 Low revenue- Cannot undertake any business related to lending and their income stream is
initially restricted to efficiency of operations and charges on remittances.
 Requirement for investing a minimum 75 % of demand deposit balances in the
government securities. .
 Offering a new and differentiated proposition will not at all be easy for Payments banks.
 Other saving instruments e.g gold bonds, Kisan Vikas Patra etc have much better returns
as compared to the payment banks.
 Jan DhanYojna experience has shown that many of the no-frill accounts have remained
dormant.
Newly Proposed Differentiated Banks
In addition to recently licensed differentiated banks such as payments banks
and small finance banks, the Reserve Bank has been exploring the
possibilities of licensing other differentiated banks such as custodian banks
and banks concentrating on wholesale and long-term financing.

Custodian banks: Custodian Banks are specialised financial institutions mainly

responsible for safeguarding a firm’s or individual’s financial assets and are
typically not engaged in conventional retail lending.

Wholesale banks: Wholesale banks are lenders that cater to large corporates
which require long-term finance, particularly those engaged in infrastructure
development. Typically, these banks raise long-term funds which are
exempted from maintaining regulatory requirements like cash reserve ratio
and statutory liquidity ratio.

Summary and Way forward

 Both Payments Banks and Small Finance Banks are ‘niche’ or
‘differentiated’ banks with the common objective of furthering financial
inclusion.
 India’s domestic remittance market is estimated to be about Rs 800-900
billion and growing. With money transfer made possible through mobile
phones, a big chunk of it, especially that of the migrant labour could shift
to this new platform.
 Payment bank can also play a significant role in implementing the
government Direct Benefit Transfer scheme, where subsidies on health
care, education and gas are paid directly to beneficiaries’ account.
 Payment banks have proved hugely popular in other developing
countries. In Kenya, the most cited success story, Vodafone M-Pesa is
used by two in three of adults to store money, make purchases and
transfer funds to friends, relatives etc.