All about differentiated bank - Payment Banks and Small Finance Bank

The Reserve Bank of India on July 17, 2014 released - two separate draft guidelines for licensing of two new categories of banks - Payment Banks and Small Finance Banks.

Both Payments Banks and Small Banks are niche or differentiated banks with the common objective of furthering financial inclusion.

Differentiated Bank

Differentiated bank refers to the system of different licenses in contrast to the existing universal bank (SBI, ICICI etc). The universal banks including the PSBs and private sector banks can provide all banking services and products. On the other hand, under differentiated banking license, the Small Finance Banks and Payments Banks can provided only selected products (and in prescribed geographies).

Impetus to licence

The impetus to licence ‘niche banks’ arises out of the need to spread financial inclusion in the country.

It is estimated that almost 40 per cent of the population do not have access to any form of formal banking.

Spreading the banking habit, accompanied by financial literacy, is a priority. Launch of these niche banks is an important milestone in the journey towards inclusion.

The issue of beefing up the institutional structure to spread financial inclusion has been engaging policymakers for a long time.

In fact, the two-stage bank nationalisation that began in 1969 had as one of its key objectives the spread of the banking habit through opening branches in hitherto un-banked areas. Also Local area banks work from 1996.

Regional rural banks (RRBs) can be considered to be one form of niche banks, concentrating on agriculture in a narrow well defined area.

They were invariably promoted by full-fledged commercial banks. For a variety of reasons, RRBs never really took off, but from their experience plenty of lessons relevant for today’s niche banks can be drawn.

In January, the Nachiket Mor Committee mooted the idea of these differentiated banks as a means to further inclusion. It laid down an ambitious road map for attaining specific goals of inclusion.

New stripped-down type of banks, which are expected to reach customers mainly through their mobile phones rather than traditional bank branches. They will work as the Busuness Corspondent to a bank.

What are Payment Banks?

New stripped-down type of banks, which are expected to reach customers mainly through their mobile phones rather than traditional bank branches. They will work as the Busuness Corspondent to a bank.

What they can and can’t do

(i) It can hold a maximum balance of 1 lakh rupees per customer.

(ii) It can an issue ATM/debit cards but no credit cards, usable on ATM networks of all banks.

(iii) Offer payments and remittance services.

(iv) Deal in simple financial products like insurance products and mutual fund units.

(v) It cannot undertake lending service.

(vi) They can offer services such as automatic payments of bills, and purchases in cashless, chequeless transactions through a phone.

(vii) They can transfer money directly to bank accounts at nearly no cost being a part of the gateway that connects banks.

(viii) They can provide forex cards to travellers, usable again as a debit or ATM card all over India.

(ix) They can offer forex services at charges lower than banks.

(x) They can also offer card acceptance mechanisms to third parties such as the ‘Apple Pay.’

Who has Reserve Bank granted approval to be a payment bank?

1. Aditya Birla Nuvo Ltd

2. Airtel M Commerce Services Ltd (First to start operating)

3. Cholamandalam Distribution Services Ltd**

4. Department of Posts

5. Fino PayTech Ltd

6. National Securities Depository Ltd

7. Reliance Industries Ltd

8. Dilip Shantilal Shanghvi**

9. Vijay Shekhar Sharma

10. Tech Mahindra Ltd**

11. Vodafone m-pesa Ltd

** They are opted out and decided not to go in payment bank.

Key Points about Payment Bank

This is for the first time in the history of India's banking sector that RBI is giving out differentiated licences for specific activities.

It’s a step to redefine banking in India. The Reserve Bank expects payment banks to target India’s migrant labourers, low-income households and small businesses, offering savings accounts and remittance services with a low transaction cost.

It hopes payments banks will enable poorer citizens who transact only in cash to take their first step into formal banking.

It could be uneconomical for traditional banks to open branches in every village but the mobile phones coverage is a promising low-cost platform for quickly taking basic banking services to every rural citizen.

The innovation is also expected to accelerate India’s journey into a cashless economy.

India’s domestic remittance market is estimated to be about Rs. 800-900 billion and growing.

With money transfers made possible through mobile phones, a big chunk of it, especially that of the migrant labour, could shift to this new platform.

Payment banks can also play a crucial role in implementing the government’s direct benefit transfer scheme, where subsidies on healthcare, education and gas are paid directly to beneficiaries’ accounts.

Also, this is the first time since banks were nationalized, that private sector business groups have bagged the RBI’s nod for banking services.

Small finance banks will offer basic banking services and lend to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and entities in the unorganized sector.

What are Small Finance Banks?

Small finance banks will offer basic banking services and lend to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and entities in the unorganized sector. RBI gave in-principle approval to 10 small finance banks.

In-principal Approval to 11 Small Banks

The Reserve Bank of India (RBI) has granted ‘in-principle’ approval for 10 companies to set up small finance banks.

The approval will be valid for 18 months to enable the applicants to comply with the requirements.

The firms include

1. Au Financiers (India) Ltd.,Jaipur,

2. Capital Local Area Bank Ltd., Jalandhar,

3. Disha Microfin Pvt., Ahmedabad

4. Utkarsh Micro Finance Pvt. Varanasi, (First start operating)

5. Equitas Holdings Pvt.,

6. Chennai, ESAF Microfinance and Investments Pvt., Chennai,

7. Janalakshmi Financial Services Pvt., Bengaluru

8. Ujjivan Financial Services Pvt., Bengaluru.

9. RGVN (North East) and Microfinance Ltd., Guwahati,

10. Suryoday Micro Finance Pvt.

Consumers may not like the idea of differentiated banks as they would need to approach different banks for different financial needs but since the idea is to cover the vast tract of unbanked geography, this will not be an issue as access to any kind of bank will be welcome in rural India, unlike the urban pockets where most banks are one-stop shops, catering to every financial need of a customer.

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Comments ( 1 )

  1. Ash Jais
    7 years ago
    Very helpful and informative article Easy to understand Keep posting