Have you ever heard of payment banks and small finance banks? Well, these banks were suggested by the Committee on Comprehensive Financial Services for Small Businesses and Low-income Households, a committee set up by the Reserve Bank of India in 2014. The committee’s purpose was to come up with measures to extend financial services to underserved segments of the population in India.
Interestingly, payment banks and small finance banks have a different focus than traditional commercial banks. Payment banks mainly aim to provide basic banking services, such as deposits and transactions, to people who do not have access to formal banking more broadly. On the other hand, small finance banks are primarily focused on providing credit and other banking services to those who are not served by conventional banks, mainly small businesses and low-income households in rural areas.
The committee’s recommendation has significantly boosted financial inclusion in India, helping to provide basic banking services to millions of people who were previously excluded from the banking system. These banks offer a new business model that are much more customer-centric and tend to offer better value products and services than traditional banks. Moreover, their establishment has fostered competition in the banking sector, driving incumbents to come up with better products and services to remain competitive.
Recommendations for the Establishment of Payment Banks and Small Finance Banks
The Reserve Bank of India (RBI) had set up a committee under the guidance of Nachiket Mor to formulate a strategy on financial inclusion in India. The committee, in its report, recommended the formation of payment banks and small finance banks to achieve financial inclusion and increase competition in the banking sector.
- Payment Banks: The committee recommended that payment banks be set up with a view to widen the coverage of payment services, especially in remote areas where large commercial banks are unable to reach. Payment banks are designed to provide simple deposit and payment services to millions of people who don’t have access to a full range of banking services. They are allowed to accept deposits of up to Rs. 1 lakh per account, issue ATM and debit cards, and distribute simple financial products like Mutual Funds and Insurance products. Payment banks are not allowed to offer credit products or loan facilities.
- Small Finance Banks: The committee recommended the establishment of small finance banks to provide access to credit to small and marginal farmers, micro and small enterprises, and others who do not have access to the formal banking system. Small finance banks can accept deposits and provide loans to unserved and underserved sections of the society, including the micro and small business segments, the unorganized sector, low-income households, and individuals with poor or no credit history. Small finance banks can also undertake other activities like fee-based services, treasury operations, and investments in capital market instruments. The committee recommended that the minimum paid-up capital for small finance banks should be Rs. 100 crore.
The RBI Guidelines on Payment Banks and Small Finance Banks
The RBI has issued guidelines for the establishment of payment banks and small finance banks in India. According to these guidelines, the promoter of a payment bank or a small finance bank must have a sound track record and be financially sound. The guidelines also stipulate that the promoters of the banks must maintain a minimum paid-up capital of Rs. 100 crores for small finance banks and Rs. 200 crores for payment banks. The promoters must also maintain a minimum net worth of Rs. 500 crores for payment banks and Rs. 200 crores for small finance banks. Payment banks and small finance banks are subject to the same prudential norms and regulations as other commercial banks in India.
| Payment Banks | Small Finance Banks |
|---|---|
| Allowed to accept deposits of up to Rs. 1 lakh per account | Can accept deposits from the public and provide loans |
| Not allowed to offer credit products or loan facilities | Can offer credit products and loan facilities |
| Can issue ATM/debit cards and distribute simple financial products | Can also offer other fee-based services, treasury operations, and investments in capital market instruments |
The introduction of payment banks and small finance banks is expected to increase the penetration of financial services in India and promote financial inclusion. These banks will provide a range of banking services to underserved sections of the society, including the unbanked, under-banked, and marginalized sections of the society. By increasing competition in the banking sector, payment banks and small finance banks are also expected to drive innovation and improve the quality of financial services offered in India.
Role of RBI in implementing committee’s recommendations
The Reserve Bank of India (RBI) played a crucial role in implementing the recommendations made by the committees that led to the establishment of payment banks and small finance banks.
- The RBI constituted the Nachiket Mor Committee in 2013 to examine the feasibility of setting up payment banks in the country.
- The committee recommended the licensing of payment banks, which led to the establishment of the first payment bank in India in 2016.
- The RBI also set up the Usha Thorat Committee in 2015 to look into the setting up of small finance banks.
- The committee recommended the licensing of small finance banks, which led to the establishment of the first small finance bank in India in 2017.
In addition to setting up these committees, the RBI also played an important role in implementing their recommendations:
- The RBI developed a framework for licensing payment banks and small finance banks, which included eligibility criteria and operational guidelines.
- The RBI also ensured that the licensing process was transparent and fair, with a focus on promoting financial inclusion and providing access to basic banking services to underserved sections of the population.
- The RBI monitored the performance of payment banks and small finance banks, and took corrective actions when necessary to ensure their stability and sustainability.
The RBI’s role in implementing the committees’ recommendations was critical in promoting financial inclusion and increasing access to banking services for the masses. Today, payment banks and small finance banks are playing an important role in providing basic banking services to millions of customers across the country.
Overall, the establishment of payment banks and small finance banks has been a significant development in the Indian banking sector, and the RBI’s proactive role has been instrumental in making this a reality.
| Committee | Year | Recommendations |
|---|---|---|
| Nachiket Mor Committee | 2013 | Licensing of payment banks |
| Usha Thorat Committee | 2015 | Licensing of small finance banks |
In conclusion, the RBI has played a pivotal role in the establishment of payment banks and small finance banks in India, from setting up committees to developing licensing frameworks and monitoring their performance. These initiatives have helped promote financial inclusion and provide access to basic banking services to millions of people across the country.
Basic guidelines for payment banks and small finance banks
The Reserve Bank of India (RBI) had proposed the establishment of payment banks and small finance banks to provide basic banking services to unbanked and under-banked sections of the population. The guidelines for these banks were as follows:
- Payment banks:
- Only individuals and small businesses can open accounts.
- The maximum balance in an account cannot exceed INR 1 lakh (approximately $1,360).
- Payment banks can issue debit cards but not credit cards.
- They can offer payment and remittance services, but cannot lend money to customers.
- Payment banks can partner with other banks to provide additional services.
- Small finance banks:
- They can accept deposits and offer loans to unserved and underserved sections of the population, including small and marginal farmers, micro and small industries, and entities involved in the unorganized sector.
- At least 50% of their loan portfolio should consist of loans up to INR 25 lakhs (approximately $34,000).
- They should maintain a minimum 50% loan-to-deposit ratio.
- Small finance banks are mandated to offer basic banking services like savings and current accounts, remittances, and other payment services.
These guidelines were designed to encourage innovation and financial inclusion in the banking sector while safeguarding the interests of depositors and ensuring financial stability.
Operational Guidelines for Payment Banks and Small Finance Banks
RBI had laid down several operational guidelines for payment banks and small finance banks, which included:
Payment banks:
- Payment banks are required to maintain a cash reserve ratio (CRR) of 3% of net demand and time liabilities (NDTL), which is 100% of their deposits.
- They should maintain a statutory liquidity ratio (SLR) of 18% of NDTL.
- Payment banks must have a board-approved business plan that should be reviewed annually.
- They must also have a board-approved policy on customer grievance redressal that is transparent and easily accessible to customers.
Small finance banks:
| Operational Guidelines | Requirements for Small Finance Banks |
|---|---|
| Capital Requirement | INR 200 Crores (approximately $27.3 million) |
| Promoters | The promoter’s minimum initial contribution should be at least 40% of the paid-up capital of the bank and to be brought down to 26% within 12 years from the date of commencement of operations. |
| Corporate Governance | Small finance banks should comply with the guidelines on corporate governance issued by RBI. |
| Regulatory Reporting | Small finance banks should submit compliance reports to RBI regularly. |
Overall, the guidelines and operational guidelines for payment banks and small finance banks were aimed at promoting financial inclusion while protecting the interests of depositors and maintaining the stability and integrity of the banking system.
Eligibility criteria for entities to apply for payment bank/small finance bank license
The Reserve Bank of India (RBI) had set up two committees to review the possibility of granting licenses to payment banks and small finance banks. The Nachiket Mor Committee and the Usha Thorat Committee had suggested the establishment of these banks to improve financial inclusion and credit delivery to underserved sections of society.
Entities interested in applying for a payment bank license must meet the following eligibility criteria:
- The entity must be a company registered in India under the Companies Act, 2013 or any previous legislation.
- The entity should have a minimum net worth of Rs. 100 crores at all times.
- The entity’s business model should primarily consist of providing payments and remittance services. They are not allowed to lend money or issue credit cards.
- The entity should have a sound technological infrastructure and should be able to meet all the technological requirements of operating a payment bank.
Entities interested in applying for a small finance bank license must meet the following eligibility criteria:
- The entity must be a company registered in India under the Companies Act, 2013 or any previous legislation.
- The entity should have a minimum net worth of Rs. 200 crores at all times.
- The entity’s business model should primarily consist of providing banking services to small businesses, marginal farmers, micro and small industries, and other unorganised sectors.
- The entity should have a sound technological infrastructure and should be able to meet all the technological requirements of operating a small finance bank.
The RBI has set strict criteria for entities to ensure that only financially stable and competent companies are granted licenses to operate payment banks and small finance banks. This ensures that the banks can provide high-quality banking services to the underserved sections of society and contribute to the overall growth of the Indian economy.
| Criteria | Payment Bank | Small Finance Bank |
|---|---|---|
| Minimum net worth | Rs. 100 crores | Rs. 200 crores |
| Business model | Payments and remittances | Banking services for small businesses, marginal farmers, micro and small industries, and other unorganised sectors |
| Allowed activities | Payments and remittances, not allowed to lend money or issue credit cards | Banking services, lending money, issuing credit cards |
The eligibility criteria mentioned above have been set to ensure that only competent and financially stable entities are given licenses to operate payment banks and small finance banks. This will enable these banks to provide efficient and reliable banking services to the underserved sections of society and contribute to the growth of the Indian economy.
Features and Benefits of Payment Banks and Small Finance Banks
Payment banks and small finance banks are a revolutionary concept in the world of banking. They were suggested by the Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households, also known as the Nachiket Mor Committee. Let us delve into the key features and benefits of these banks.
Features of Payment Banks:
- Payment banks are allowed to take deposits up to Rs. 1 lakh per customer.
- They can issue debit cards, offer online banking, and provide various payment and remittance services.
- Payment banks are not allowed to issue loans, credit cards, or other forms of credit.
- They are mandated to maintain a minimum capital adequacy ratio (CAR) of 15% of their risk-weighted assets.
- Payment banks can partner with other banks to offer a wide range of financial services.
Benefits of Payment Banks:
- Payment banks provide a safe and secure mode of online payment and remittance services to customers, especially those who are not well-versed with mobile banking or online transactions.
- They offer a convenient way to manage funds and make payments without the need for physical presence in a bank branch.
- Payment banks can bridge the gap between the unbanked and underbanked population and the formal banking sector by leveraging technology.
- They can help in financial inclusion by providing simple and easy-to-use banking services to low-income households and small businesses in remote areas.
Features of Small Finance Banks:
- Small finance banks can accept deposits up to Rs. 2 lakhs per customer.
- They can issue loans, credit cards, and other forms of credit.
- Small finance banks are mandated to maintain a minimum CAR of 15% of their risk-weighted assets.
- They are required to lend at least 75% of their net demand and time liabilities (NDTL) to priority sectors.
Benefits of Small Finance Banks:
- Small finance banks can provide credit and banking services to underserved and unbanked segments of the population, such as small businesses, farmers, and low-income households.
- They can help in promoting financial inclusion and supporting micro, small and medium enterprises (MSMEs), which are vital for economic growth and employment generation.
- Small finance banks can offer customized products and services to meet the specific needs of their customers, such as microloans, overdraft facilities, and savings accounts.
- They can leverage technology to offer convenient and seamless banking services to their customers, such as mobile and internet banking, and provide doorstep banking services.
Conclusion:
| Features/Benefits | Payment Banks | Small Finance Banks |
|---|---|---|
| Deposit Limit | Rs. 1 lakh per customer | Rs. 2 lakhs per customer |
| Loan and Credit Card Offerings | Not allowed | Allowed |
| Required CAR | 15% of risk-weighted assets | 15% of risk-weighted assets |
| Priority Sector Lending | Not applicable | At least 75% of NDTL |
Payment banks and small finance banks have the potential to change the banking landscape of India by providing banking services to people who have never had access to them. Both these types of banks have unique features and benefits that cater to different segments of the population. Payment banks can provide simple and hassle-free banking services to those who are not well-versed with technology, while small finance banks can offer credit and banking services to underserved and unbanked segments of the population.
Differences between payment banks, small finance banks, and conventional banks
Payment banks and small finance banks are two different types of banks that were introduced by the Reserve Bank of India (RBI) in 2014. While payment banks are aimed at promoting financial inclusion by providing basic banking services to the unbanked population, small finance banks are aimed at providing financial services to the unserved and underserved sections of the population, including micro, small and medium enterprises (MSMEs), farmers, and low-income households.
Below are some of the differences between payment banks, small finance banks, and conventional banks:
- Ownership: Payment banks can be owned by any company, including telecom companies and non-banking financial companies (NBFCs), while small finance banks have to be owned by a specialized entity, such as an NBFC, microfinance institution (MFI), or a local area bank (LAB). Conventional banks, on the other hand, can be owned by public sector entities, private sector entities, or foreign entities.
- Deposit limit: Payment banks can accept deposits up to a maximum of ₹2 lakh per customer, while small finance banks can accept deposits up to a maximum of ₹1 lakh per customer. Conventional banks have no such deposit limit.
- Lending activities: Payment banks are not allowed to undertake lending activities, while small finance banks can undertake lending activities like a regular bank, with certain restrictions. Conventional banks are fully authorized to undertake lending activities.
- Credit facilities: Payment banks cannot issue credit cards or offer any kind of credit facilities, while small finance banks can offer credit facilities such as loans, overdrafts, and other credit products. Conventional banks offer a wide range of credit facilities to their customers.
- Branch network: Payment banks cannot have more than one-third of their branches in rural areas, while small finance banks have to have at least 50% of their branches in rural areas. Conventional banks have a much wider geographical reach and have a presence in both urban and rural areas.
It is worth noting that payment banks and small finance banks are not a replacement for conventional banks, rather they are meant to complement their efforts in promoting financial inclusion and providing banking services to all sections of the society. The table below summarizes the key differences between payment banks, small finance banks, and conventional banks:
| Parameter | Payment Banks | Small Finance Banks | Conventional Banks |
|---|---|---|---|
| Ownership | Any company | Specialized entity | Public/Private/Foreign entities |
| Deposit limit | Up to ₹2 lakh | Up to ₹1 lakh | No limit |
| Lending activities | Not allowed | Allowed with restrictions | Fully authorized |
| Credit facilities | Cannot offer | Offered | Wide range offered |
| Branch network | One-third in rural areas | At least 50% in rural areas | Wider network in both urban and rural areas |
Understanding the differences between these banks is important for individuals and businesses to make an informed decision about which type of bank best suits their needs.
Current status and future prospects of payment banks and small finance banks in India
Payment banks and small finance banks were established in India on the recommendation of the Nachiket Mor Committee in 2014. These banks were expected to bring financial inclusion to the unbanked and underbanked population of India.
- Payment banks: These banks are allowed to accept deposits and provide services such as remittances, mobile payments, and net banking. They cannot issue credit cards or lend money. Currently, there are six payment banks operating in India, including Airtel Payments Bank, Paytm Payments Bank, and India Post Payments Bank.
- Small finance banks: These banks are allowed to accept deposits and lend money to small business units, farmers, and low-income households. They can also provide services such as ATM/debit card, mobile banking, and locker facilities. Currently, there are ten small finance banks operating in India, including Ujjivan Small Finance Bank, Equitas Small Finance Bank, and Fincare Small Finance Bank.
The current status of payment banks and small finance banks in India is a mixed bag. While these new banks have brought financial services to underserved areas and have increased competition in the banking industry, they have also faced challenges such as profitability issues and regulatory restrictions.
Despite these challenges, the future prospects for payment banks and small finance banks in India look promising. With increasing digitization and a growing demand for financial services among the unbanked and underbanked population, payment banks and small finance banks are well-positioned to tap into this market. They also have the advantage of lower operating costs and high-tech infrastructure, which allows them to offer low-cost services to customers.
Moreover, the Reserve Bank of India has recently relaxed regulatory guidelines for these new banks, allowing them to expand their product offerings and geographic reach. For instance, payment banks can now offer products such as recurring deposits, while small finance banks can now open branches anywhere in the country without prior approval from the regulator.
| Payment Banks | Small Finance Banks |
|---|---|
| Six payment banks currently operating in India | Ten small finance banks currently operating in India |
| Challenges: profitability, regulatory restrictions | Challenges: high costs, low awareness among customers |
| Prospects: increasing digitization, growing demand for financial services among unbanked/underbanked population, relaxed regulatory guidelines | Prospects: growing demand for financial services among small business units, farmers, and low-income households, relaxed regulatory guidelines |
In conclusion, payment banks and small finance banks have the potential to revolutionize the Indian banking industry by bringing financial services to underserved areas and customers. While these new banks have faced challenges in their early years, their future prospects look promising as they expand their product offerings and geographic reach.
Which Committee had suggested the establishment of Payment Banks and Small Finance Banks FAQs
1. Which committee had recommended the establishment of Payment Banks and Small Finance Banks?
The Nachiket Mor Committee had recommended the establishment of Payment Banks and Small Finance Banks in its report submitted to the Reserve Bank of India (RBI) in 2014.
2. What was the objective of the Nachiket Mor Committee in suggesting Payment Banks and Small Finance Banks?
The Nachiket Mor Committee was formed to study the availability of financial services to the population. It recommended the establishment of Payment Banks and Small Finance Banks to increase financial inclusion and provide basic banking services to the unbanked and under-banked population.
3. What is the difference between Payment Banks and Small Finance Banks?
Payment Banks can accept deposits up to Rs. 1 lakh per customer, issue debit cards, provide mobile banking and net banking. However, payment banks cannot lend money to customers. Small Finance Banks, on the other hand, can provide small loans and accept deposits like a regular bank.
4. How many Payment Banks and Small Finance Banks are currently operating in India?
As of 2021, there are seven Payment Banks and 10 Small Finance Banks operating in India. Some of the prominent payment banks are Airtel Payments Bank, Paytm Payments Bank, and India Post Payments Bank. Small Finance Banks like Ujjivan Small Finance Bank, Equitas Small Finance Bank, and Fincare Small Finance Bank are some of the well-known names.
5. What are the benefits of Payment Banks and Small Finance Banks?
Payment Banks and Small Finance Banks are beneficial to the unbanked and under-banked population as they provide basic banking services at a low cost. They also promote financial inclusion by opening bank accounts of people who do not have access to regular banks. Moreover, they also offer financial opportunities to small businesses and individuals who face difficulty in getting loans from regular banks.
6. How can one open an account with Payment Banks and Small Finance Banks?
Opening an account with Payment Banks and Small Finance Banks is easy and hassle-free. One can visit their website, download their mobile app, or visit their nearest branch to open an account. KYC documentation like Aadhaar card, PAN card, and address proof is required to open an account.
Closing thoughts
Thank you for reading about which committee had suggested the establishment of Payment Banks and Small Finance Banks. We hope that this article has helped you understand the background and benefits of these banks. Please come back for more informative articles in the future.