Small Finance Banks and Payment Banks

  • July 28, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Small Finance Banks and Payment Banks

Subject :Economy

Section: Monetary Policy

Small Finance Banks are the financial institutions which provide financial services to the unserved and unbanked region of the country.

  • They are registered as a public limited company under the Companies Act, 2013.
  • Small Finance Banks are governed by the provisions of the:
    • Banking Regulation Act, 1949;
    • Reserve Bank of India Act, 1934;
    • Foreign Exchange Management Act, 1999;
    • Payment and Settlement Systems Act, 2007;
    • Credit Information Companies (Regulation) Act, 2005;
    • Deposit Insurance and Credit Guarantee Corporation Act, 1961;
    • Other relevant Statutes and the Directives, Prudential Regulations and other Guidelines/Instructions issued by Reserve Bank of India (RBI) and other regulators from time to time.
  • SFBs will be given scheduled bank status once they commence their operations, and found suitable as per Section 42 of the Reserve Bank of India Act, 1934.

Differentiated Banks vs Universal Banks

  • There are two kinds of banking licences that are granted by the Reserve Bank of India – Universal Bank Licence and Differentiated Bank Licence.
  • Differentiated Banks (niche banks) are banks that serve the needs of a certain demographic segment of the population. Small Finance Banks and Payment Banks are examples of differentiated banks in India.
  • Differentiated banks are distinct from Universal Banks (Eg: Commercial Banks like SBI, HDFC, ICICI etc) as they are infused as niche segments. Niche banks typically target a specific market and tailor the bank’s operations to this target market’s preferences.
  • The differentiation could be on account of capital requirement, the scope of activities or area of operations. As such, they offer a limited range of services/products or function under a different regulatory dispensation.

SFBs are expected to deploy 75 per cent of their loans in priority sectors (agriculture and allied activities; micro, small and medium enterprises; education; housing; others), with at least 50 per cent of loans below ₹25 lakh. The PSL threshold for a universal bank is lower at 40 per cent.

The minimum capital adequacy ratio that an SFB has to maintain is 15 per cent (against 9 per cent for universal banks).

As a universal bank, the priority sector requirements for Equitas will reduce from 75 per cent to 40 per cent, while the transition into an SFB will allow Fino to lend to its customers.

Payment Bank

A payments bank is like any other bank, but operating on a smaller scale without involving any credit risk. In simple words, it can carry out most banking operations but can’t advance loans or issue credit cards. It can accept demand deposits (up to Rs 1 lakh), offer remittance services, mobile payments/transfers/purchases and other banking services like ATM/debit cards, net banking and third-party fund transfers.

Why payments banks?

The main objective of payments bank is to widen the spread of payment and financial services to small business, low-income households, migrant labour workforce in secured technology-driven environment.

With payments banks, RBI seeks to increase the penetration level of financial services to the remote areas of the country.

economy Small Finance Banks and Payment Banks