PAYMENT BANKS AND SMALL

FINANCE BANKS
CS Rupali Kulshrestha
Vinod Kothari & Company
CLASSIFICATION OF FINANCIAL
INTERMEDIARIES

Financial Intermediaries

Banks Non- Banking

Financial Institutions

Commercial Banks Co-operative Banks

Public Private Foreign Differential

Banks Banks Banks Banks

Regional Rural Banks Local Area Banks Payment Banks Small Finance Banks
BACKGROUND TO PAYMENT BANKS IN
INDIA
• A Committee on Comprehensive Financial Services for Small Businesses
and Low Income Households was formed by RBI
Sept
2013 • The Committee was headed by Nachiket Mor

• Committee submitted its final report to RBI

• One of its recommendations was the formation of a new category of bank called
Jan 2014 payments banks

• It was decided that RBI will create a framework for licensing small
Union banks and other differentiated banks.
Budget
2014-15

• RBI came out with Guidelines on licensing of Payment Banks

Nov
2014

• RBI grants in-principle approval to 11 entities to set up Payment Banks which will
be valid for a period of 18 months
Aug 2015
PAYMENT BANKS- 1/4
 Registration, licensing and regulations
 Should be registered as a Public Limited Company under
the Companies Act, 2013
 Licensed under section 22 of the Banking regulation Act,
1949
 Restrict its activities mainly to acceptance of demand
deposits and provision of payment and remittance services
 Should use the word “Payment Bank” in its name
 Objective of setting up Payment Banks
 Providing small savings account
 Payment/ remittance services to migrant labour
workforce, low income households, small businesses,
other unorganised sector entities and other users, by
enabling high volume-low value transactions in deposits
and payments / remittance services in a secured
technology-driven environment
PAYMENT BANKS- 2/4
 Who may apply:
 Existing non-bank Pre-paid Payment Instrument
(PPI) issuers authorised under the Payment and
Settlement Systems Act, 2007 (PSS Act); and
 Individuals / professionals;

 Non-Banking Finance Companies (NBFCs),

corporate BCs, mobile telephone companies,
super-market chains, companies, real sector co-
operatives that are owned and controlled by
residents; and
 Public sector entities
PAYMENT BANKS- 3/4
 Activities which can be undertaken by Payment Banks
 Acceptance of demand deposits;
Restricted to holding a minimum balance of Rs. 1,00,000 per individual
customer
 Issuance of ATM/Debit cards
 Cannot issue credit cards
 Payment and remittance services
 Issuance of Pre-paid Payment Instruments
 Internet banking
 Functioning as Business correspondent of other banks
 Non-risk sharing simple financial services activities such as
distribution of mutual fund units, insurance products, pension
products, etc. with the prior approval of the RBI and after complying
with the requirements of the sectoral regulator
 Utility bill payments etc.
 Activities which cannot be undertaken by Payment Banks
 Lending activities
PAYMENT BANKS- 4/4
 Other restrictions on Payment Banks
 invest minimum 75 per cent of its "demand deposit balances" in Government
securities/Treasury Bills with maturity up to one year for maintenance of SLR
 hold maximum 25 per cent in current and time / fixed deposits with other
scheduled commercial banks for operational purpose and liquidity
management
 shall have paid up equity capital of Rs. 100 crores
 Shall maintain a minimum capital adequacy ratio of 15 per cent of its risk
weighted assets (RWA)
 Tier I capital should be at least 7.5 per cent of RWAs.
 Tier II capital should be limited to maximum of 100 per cent of total Tier I
capital
 should have a leverage ratio of not less than 3 per cent

 Promoters Contribution
 Promoters should hold at least 40 per cent of its paid-up equity capital for the
first five years from the commencement of its business
 Mandatory listing if the net worth reaches Rs. 500 crores within three years of
reaching that net worth
SMALL FINANCE BANKS- 1/4
 Registration, licensing and regulations
 Should be registered as a Public Limited Company under
the Companies Act, 2013
 Should be licensed under section 22 of the Banking
Regulation Act, 1949
 Should be given Scheduled Bank status once they
commence their operations
 Should use the word “Small Finance Bank” in its name

 Objective of setting up Small Finance Banks

 Provision of saving vehicle to unserved and underserved
section of the population;
 Supply of credit to small business units, small and
marginal farmers, micro and small industries and other
unorganised sector entities through high technology-low
cost operations
SMALL FINANCE BANKS- 2/4
 Who may apply:
 Resident individuals/professionals with 10 years
of experience in banking and finance
 Companies and Societies owned and controlled
by residents
 Existing Non-Banking Finance Companies
(NBFCs), Micro Finance Institutions (MFIs) and
Local Area Banks (LABs) that are owned and
controlled by residents can also opt for
conversion into small finance banks
 Who may not apply:
 Large public sector entities and industrial and
business houses
SMALL FINANCE BANKS- 3/4
 Activities which can be undertaken by Small Finance
Banks
 Acceptance of deposits;
 Lending activities;
 Can become a Category II Authorised Dealer in foreign
exchange business
 Internet banking
 Functioning as business correspondent of other banks
 Non-risk sharing simple financial services activities such as
distribution of mutual fund units, insurance products, pension
products, etc. with the prior approval of the RBI and after
complying with the requirements of the sectoral regulator
 Utility bill payments etc.
 Activities which cannot be undertaken by Small Finance
Banks
 cannot set up subsidiaries to undertake non-banking financial
services activities
SMALL FINANCE BANKS- 4/4
 Other restrictions on Small Finance Banks
 shall have paid up equity capital of Rs. 100 crores
 Shall maintain a minimum capital adequacy ratio of 15 per cent of its risk
weighted assets (RWA)
 Tier I capital should be at least 7.5 per cent of RWAs.
 Tier II capital should be limited to maximum of 100 per cent of total Tier I
capital
 should have a leverage ratio of not less than 3 per cent
 Should extend at least 75 per cent of its Adjusted Net Bank Credit to the sectors
eligible for priority sector lending
 At least 50% of the loan portfolio should consists of loans and advances up to
Rs. 25 lakhs

 Promoters Contribution
 Promoters should hold at least 40 per cent of its paid-up equity capital for the
first five years from the commencement of its business, should be brought
down to 30 per cent within a period of ten years and to 26 per cent within a
period of twelve years
 Mandatory listing if the net worth reaches Rs. 500 crores within three years of
reaching that net worth
DIFFERENCE BETWEEN SMALL FINANCE
BANKS AND PAYMENT BANKS

Point of Difference Small Finance Payment Banks

Banks
Acceptance of deposits Can accept all types of Can only accept
deposits demand deposits
Lending activity have to lend 75 % of Cannot undertake
their Adjusted Net lending activities
Bank Credit (ANBC) to
PSL areas
Target customers Unserved and under- Migrant labour
served section of workforce and low
society income households
Future growth and Can evolve into Not explicitly
evolution universal banks after mentioned
five years at the
discretion of RBI
SIMILARITIES BETWEEN SMALL FINANCE
BANKS AND PAYMENT BANKS

Providing deposit services to its customers

Focus should be on unbanked population

Helps in motivating people to save their excess funds

Provide interest on the savings held with these banks

Provide payment and remittance services

SIMILARITIES AND DIFFERENCE
BETWEEN VARIOUS BANKS

System Accept Grant Loan Make

deposit Payment
1) Commercial Yes Yes Yes
Banks (SBI,
Canara, etc.)
2) Small Yes Yes Yes
Finance Banks
3) Payment Yes No Yes
Banks
RELEVANCE OF SMALL FINANCE BANKS AND
PAYMENT BANKS IN INDIA

Financial
inclusion

Can perform Provide

almost all the banking
functions that a
bank performs services to
but on a small unserved
scale areas

Meet payment and

remittance needs
of small
businesses,
Niche Banks
unorganized
sector and low
income
households