(Article) Payment Banks and Small Finance Banks

Payment   banks   have   the   primary   objective   of financial inclusion through providing small savings accounts and payment/remittance services to the 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 payment / remittance services in a secured technology-driven environment. Payment banks are not allowed to undertake lending activities and will be restricted to holding a maximum balance of ₹100,000 per individual customer initially. Apart from amounts maintained as CRR with the Reserve Bank on outside demand and time liabilities, these banks will be required to invest minimum 75 per cent of their ‘demand deposit balances’ in government securities/treasury bills and in other securities with maturity up to one year that are recognised by the Reserve Bank as eligible securities for maintaining SLR and hold maximum 25 per cent in current and time/ fixed deposits with other  SCBs  for operational purposes and liquidity management. The 11 applicants who have received in-principle approval for setting up payment banks propose to bring fresh capital of ₹ 16.22 billion to the banking system and an addition  of 1,140  bank  branches in their first year  of operation.

The  objective   of  setting   up  of  small  finance   banks (SFBs) is furthering financial inclusion  by (i) providing  savings  vehicles  primarily  to  unserved and  underserved  sections  of  the  population,  and (ii)  supplying  credit  to  small  business  units,  small and  marginal  farmers,  micro  and  small  industries, and other unorganised sector entities, through high technology-low cost operations. SFBs have a priority sector lending target of 75 per cent of adjusted net bank credit (ANBC) and at least 50 per cent of the loan portfolio should comprise of loans and advances of up to ₹2.5 million. The 10 applicants who have received in-principle approval for setting up SFBs propose to bring fresh capital of ₹ 57.34 billion to the banking system and an addition of 2,444 bank branches in the first year  of operation.

A working group has been formed to examine and finalise the  regulatory and  supervisory framework  for payment banks and  small  finance  banks. The  group is currently examining the various issues that need to be addressed considering the size and scope of these banks.

Courtesy: Financial Stability Report, Issue No. 12, Reserve Bank India