Small – Payments Banks For Unbanked

Paving the way for niche banking, the Reserve Bank of India (RBI) recently issued
draft guidelines for two new categories of banks—small and payments and states that these can improve financial

At the moment, there are commercial
banks—public, private and foreign—which provide a full range of services to
retail customers, small and medium enterprises, industries, low-income groups
and high net worth individuals. Then there are cooperative and local area banks
that provide banking services.
The idea of payments banks was first
proposed by the Nachiket Mor committee
on financial inclusion.

about small and payments banks and how they are different from other banks
in size, big on aim:

Small banks will be:
i. Smaller in size and operations
compared with existing commercial banks.
ii. And these will offer both deposits as
well as loan products.
iii. But unlike existing commercial banks,
these will be limited to basic products.
iv. Also, they will have operations in
limited areas, say in a single state at the initial stage.
v. These banks will be extensively
operated on technology, especially to reduce operational costs.
vi. They will not deal with sophisticated
– Payments banks will be used only for
transaction purposes and for deposits. Unlike small banks, payments banks can’t
lend money to people.
Hence, payments banks will offer only
a limited range of products such as acceptance of demand deposits and
remittance of funds.
RBI states that small banks will act
as a savings vehicle to the under-served and unreserved sections of the society.
Hence, target customers will be micro and small enterprises, agriculture, and
unbanked and under-banked population.
According to the draft guidelines:
– The minimum paid-up capital
requirement of both payments banks and small banks is Rs. 100 crore. The
payments bank will have to invest in government securities with a maturity of
up to one year.

– At least 50% of a small bank’s loan
portfolio should constitute loans and advances of up to Rs.25 lakh. Which means
loans will be smaller in size.

– Of the minimum capital, the guidelines said, the promoters’ initial minimum
contribution will be at least 40 per cent, to be locked in for a period of five

– Shareholding of the promoters should
be brought down to 40 per cent within three years, 30 per cent within a period
of 10 years, and to 26% within 12 years from the date of commencement of
business of the bank, it said.
– As far as small banks are concerned,
it will be subject to all prudential norms and regulations of RBI as applicable
to existing commercial banks including requirement of maintenance of Cash
Reserve Ratio and Statutory Liquidity Ratio.
– “The maximum loan size and
investment limit exposure to single or group borrowers or issuers would be
restricted to 15% of its capital funds,” it said.
– At least 50% of its loan portfolio
should constitute loans and advances of size upto Rs. 25 lakh in
order to extend loans primarily to micro enterprises, it said.
– Payments Banks cannot set up subsidiaries to undertake NBFC business. 
– As in the case of Small Banks, other
financial and non-financial services activities of the promoters should be
– The Payments Banks would be required
to use the word ‘Payments’ in its name to differentiate it from other banks.
However, in view of concentration of
its area of operations, the small bank will be required to have a well
diversified portfolio of loans and advances spread over its area of operations,
it said.
According to RBI, the primary
objective of setting up such banks is to extend financial inclusion by
providing small savings accounts and payment or remittance services to migrant
labourers, low-income households, small businesses, unorganized sector entities
and other such users.
In terms of network, payments banks
are expected to have access points particularly in remote areas.
For a payments bank, the access point
can be its own branch, business correspondents (BCs) or other network partners.
Just as small banks, technological solutions to lower costs will be the key for
payments banks as well.
Like all other bank deposits, deposits
in these banks, too, would be covered under the deposit insurance scheme of the
Deposit Insurance and Credit Guarantee Corp. of India (DICGC), a wholly owned
subsidiary of RBI.
As of now, at least 2,199 banks are
insured by DICGC. Each deposit in the new banks will be insured up to a maximum
of Rs.1 lakh for both principal and interest amount. As per the guidelines,
payments banks will be restricted to hold a maximum balance of Rs.1 lakh per

Who can apply?

According to RBI’s draft guidelines,
entities that can apply to become a payments bank include non-bank pre-paid
payment instrument issuers, non-banking financial companies (NBFCs), corporate
BCs, mobile telephone companies, supermarket chains, companies, real sector
cooperatives and public sector entities.
A payments bank can also become a BC
of another bank for credit and other services which it cannot offer. Hence, as
BCs they will be able to offer other bank products such as loans and deposits.
Those eligible to set up a small bank
include resident individuals with 10 years of experience in banking and
companies and societies, NBFCs, microfinance institutions and local
area banks. Some are already looking at the viability of setting up such banks.

Small & Payments banks  are
expected to cover unbanked and under-banked sections of the society