Small - Payments Banks For Unbanked

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 inclusion.

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.

Know about small and payments banks and how they are different from other banks:

Small 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 products.

- 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 years.

- 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 ring-fenced.

- 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.

Objective:

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 customer.

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 finance, 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