Payment & Small Banks: Civil Services Mentor Magazine - April - 2015

Payment and Small Banks

Only 35% of Indians have accounts with financial institutions, according to World Bank estimates. This estimate is improved after the success of Jan Dhan Yojana still vast majority of population is not able to avail the benefits of financial institutions. Out of the total around 25 crore households in the country, more than 10 crore still do not have access to banking services. Situation in rural areas is poorer than that of urban area. In rural households 44 per cent and in urban areas 33 per cent still do not have a bank account. Initially financial inclusion was considered as opening new branches in the unbanked areas but now the meaning of financial inclusion is largely changed. Financial Inclusion, broadly defined, refers to universal access to a wide range of financial services at a reasonable cost. Financial inclusion broadens the resource base of the financial system by developing a culture of savings among large segment of rural population and plays its own role in the process of economic development. The Government of India and the Reserve Bank of India have made efforts to increase the financial inclusion in the country. Notable efforts among those are; Banks nationalization, large number of branches of scheduled commercial banks, provision of priority sector lending targets, self-help groups for the purpose of financial inclusion, opening of zero balance accounts, etc. The principle reason for all above initiatives is to include financially excluded population with in financial ambit. In order to serve the financially excluded population, the Reserve Bank of India (RBI) has created two new banking categories, called small finance banks and payment banks.

Small banks functioning are similar to scheduled commercial banks but they will not offer whole range of products only basic products such as deposits and loans. Small banks will be operational in only a limited area. Resident individuals with 10 years of experience in banking and finance, companies and Societies will be eligible as promoters to set up small banks. NFBCs, micro finance institutions (MFIs), and Local Area Banks (LABs) can convert their operations into those of a small bank. Local focus and ability to serve smaller customers will be a key criterion in licensing such banks. Small Banks work with the objective of financial inclusion, with the requirement of devising vehicles to improve saving to the population which is under-served and unserved. Small Banks should also improve the supply of credit to small farmers, MSMEs, and other entities which are working in the unorganized sector. One of the necessary condition for small banks is at least half of its loans should be of up to Rs 25 lakh. Other condition regarding branches is that 25 per cent of branches should be in unbanked rural areas for the first three years. In order to retain the local feel in the small banks its area of operations in normal situation will be restricted to districts which are contiguous in a state or Union territory. However if there is necessity area of operation would be allowed to expand into contiguous districts in one or more states with reasonable geographical proximity. The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore. The promoter’s minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40 per cent and gradually brought down to 26 per cent within 12 years from the date of commencement of business of the bank.

Payment banks are meant for simple banking transactions. These banks are similar to regular banks in some aspects and different in some other aspects. Like normal banks people can open current and savings accounts but the balance of the customer should not exceed Rs 1,00,000, but depending on the performance, the RBI could enhance this limit. The payment banks are allowed to issue ATM and debit cards but they can’t issue credit cards, and they are also not allowed to provide loans. Primary bjective of payments banks is to increase financial inclusion. Instruments used would be opening of small savings accounts, migrant labours would be provided with the facility of payment/ remittance, providing high volume and low value transaction to low income households, small businesses, and other unorganised sector entities. One of the important objectives is to do the transaction in an atmosphere which is secured and driven by technology. Payments Banks cannot set up subsidiaries to undertake NBFC business. 

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