Payment Banks & Small

Banks in India
 Table of Contents
 Introduction
- What are Payment & Small Banks?
- Features
- How do they earn?
 Birth of the Concept
 Benefits
 Challenges
 Growth
 Impact on the Society
 Conclusion
What are Payments Banks
and Small Banks ?
These local area banks, payment banks and Small
Banks are expected to meet credit and remittance
needs of small businesses, unorganized sector, low
income households, farmers and migrant work
force.

RBI had already issued guidelines for licensing

Payments Banks. RBI has received around 72
applications for setting up Small Banks and 41
applications for Payments Banks. (The last date to
submit application for license was 2nd Feb,2015)
 Payments Banks
On 19 August 2015, the Reserve Bank of India gave "in-principle" licences to
eleven entities to launch payments banks. These are:

1) National Securities Depository Limited (NSDL)

2) Reliance Industries
3) Aditya Birla Nuvo
4) Airtel M Commerce
5) Department of Posts (23-Nov-2016) : India’s first
Payment Bank to go Live – Airtel
6) Fino Paytech
launches India’s first Payment
7) Tech Mahindra
bank services with 7.25% interest
8) Vodafone M-Pesa on savings accounts in Rajasthan
9) Cholamandalam Distribution services (Pilot project). Airtel mobile
10) Paytm number will be the bank account
11) Sun Pharma. number. Personal Accidental
Insurance of Rs 1 Lac with every
Savings Account will be provided.
 Small Banks
On 16 Sept 2015, the Reserve Bank of India gave "in-principle" licences to 10 small
banks. These are:

1) Au Financiers (India) Limited, Jaipur

2) Capital Local Area Bank Limited, Jalandhar
3) Disha Microfin Private Limited, Ahmedabad
4) Equitas Holdings P Limited, Chennai
5) ESAF Microfinance and Investments Private Limited, Chennai
6) Janalakshmi Financial Services Private Limited, Bengaluru
7) RGVN (North East) Microfinance Limited, Guwahati
8) Suryoday Micro Finance Private Limited, Navi Mumbai
9) Ujjivan Financial Services Private Limited, Bengaluru
10) Utkarsh Micro Finance Private Limited, Varanasi
(01-July-2016) : Chennai based Equitas holdings will be the first Small Finance
Bank in India. RBI has issued final approval & license to Equitas to launch a Small
Finance Bank.
 Objectives of Payment Bank
 (India has around 90 crore mobile users and out of which around
70 crore are active users. The total no of mobile subscribers in
rural areas are 38 crore)
 RBI in its guidelines says “The objectives of setting up of
payments banks will be to further financial inclusion by providing
(i) Small savings accounts
(ii) Payments/remittance services
To migrant labour workforce, low income households, small
businesses, other unorganised sector entities and other users”
Objectives of Small Bank
The main purpose of the small banks will be to provide a
whole suite of basic banking products such as bank deposits
and supply of credit, but in a limited area of operation. The
objective for these Small Banks is to increase financial
inclusion by provision of savings vehicles to under-served
and unserved sections of the population, supply of credit to
small farmers, micro and small industries, and other
unorganized sector entities through high technology-low cost
operations.
 Guidelines for Payment

Banks
Eligibility criteria of Applicants – Prepaid payment instruments issuers,
Professionals, NBFCs, Telecom companies, Supermarket Chains,
Corporates etc.,
 The Payments Banks would be required to use the word ‘Payments’ in its
name to differentiate it from other banks.
 The minimum capital requirement is Rs 100 crore
 What is the scope of activity? – Payments Banks can offer Deposits (only
current/saving accounts), issue ATM / Debit cards, payments and
remittances services and can also act as Distributor of Third party
products (can cross sell insurance, mutual funds etc.,)
 They would initially be restricted to holding a maximum balance /
deposit of Rs 100,000 per customer.
 They cannot issue Credit Cards.
 Payment Bank can not undertake Lending activities. They should not offer
loans.
 Guidelines for Payment
Banks
 How safe is your money in a Payments Bank? – A Payments
bank will be required to invest 75% of its demand deposits
balances in Government Securities (G-Sec) & Treasury Bills.
They have to meet Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio requirements set by RBI. A maximum of 25%
of its deposits will have to be held in current and fixed
deposits with other scheduled commercial banks.
 Guidelines for Small Banks
 Eligibility – Professionals with 10 years of experience in banking /
finance / Micro Finance Institutions.
 The minimum capital requirement is Rs 100 crore (minimum paid-
up equity capital).
 Local focus and ability to serve smaller customers will be a key
criterion in licensing such banks.
 The bank shall primarily undertake basic banking activities of
accepting deposits and lending to small farmers, small
businesses, micro and small industries, and unorganized
sector entities. It cannot set up subsidiaries to undertake non-
banking financial services activities. After the initial
stabilization period of five years, and after a review, the RBI
may liberalize the scope of activities for Small Banks.
 Guidelines for Small Banks
 The area of operations would normally be restricted to few
districts (near-by) of a state. However, if necessary, it would
be allowed to expand its area of operations beyond
contiguous districts in one or more states with reasonable
geographical proximity.
 Small Banks have to meet RBI’s norms and regulations
regarding risk management. They have to meet CRR and
SLR requirements, like any other commercial bank.
 The maximum loan size and investment limit exposure to
single/group borrowers/issuers would be restricted to 15 per
cent of capital funds.
 Guidelines for Small Banks
 For the first three years, 25 per cent of branches should be in
unbanked rural areas.
 Of the loans issued by Small Banks, 75% should be to the so-
called priority sector which includes agriculture and small
businesses. And half the loan portfolio of the banks should be
loans and advances of up to Rs.25 lakh to micro finance
businesses.
 A robust risk management framework should be followed and
the banks would be subject to all prudential norms and
regulations that are set by RBI. (These norms are similar to
the ones that are applicable to the existing commercial banks,
like maintaining CRR & SLR etc.,)
Payments Banks V/s Small Banks
 How do they Earn?
 Traditional banks earn by charging a higher interest rate for
advances and giving a lower rate of interest for deposits. The
margin results in the profit for them.

 Since Payment banks are not allowed to extend loans to the

public and are yet expected to give interest rates at par with the
commercial banks to remain competitive, the question being
asked is how these new banks will be able to survive in absence of
income from lending.

 RBI has allowed these banks to invest 75% in Government

Securities and 25% as deposit in other banks.
 How do they Earn?
Continued…
 These payments banks are expected to play on volumes as they
are likely to romp in to their millions of customers, who are
currently not within the fold of the formal financial system.

 This would lead to large volumes of transactions fetching the

payments banks fees - a charge of even 1 or 2 per cent on a large
volume can be lucrative on normal cash transfers, which will
include government’s direct benefits transfer programmes.

 Moreover, with no need for any provisions or losses on NPAs for

these payment banks, they may become fitter banks than existing
banks.
 Birth of the Concept
 The Payment Banks and Small Banks came into existence as a result of
the Nachiket Mor and Usha Thorat Committee respectively.

 Officially known as “Committee on Comprehensive Financial Services for

Small Businesses and Low Income Households” Formed by the RBI
Governer Mr Raguram Rajan on 23 September 2013.

 It was an expert committee which was to study and provide much-

needed insight on Financial Inclusion in India.

 This committee had submitted its report in January 2014 and had
recommended, among other things, setting up of the Small Banks and
Payment Banks.
 Financial Inclusion
Financial Inclusion is a drive by the government to bring
everyone in the nation under the ambit of basic Financial
Services.

It has 4 basic pillars:

 BANKING: Savings & payment (through ATM, cheques, e-
transfer etc.)
 CREDIT: Loans @affordable interest rates.
 INVESTMENT: Mutual funds, Pension plans, Child
investment plans etc.
 INSURANCE: Life Insurance and non-life (general)
insurance.
 Why we need Financial

Inclusion?
It Turns savings into investment. Circular flow of income => helps the economy.

 Insurance/investment/savings => Protects family against unfortunate

circumstances.

 Income inequality falls in areas that have more developed financial

intermediaries (banks, insurance companies).

 In the 80s, countries that focused on providing easy financial services to small
businessmen became large economies today be it Japan, South Korea or USA.

 If all of the government subsidy/benefit payments are done via netbanking/e-

transfer then Rs.1 lakh crore rupee will be saved per year in terms of
manpower-time-paperwork-leakages. [As per Mckinsey research.]
 Continued
 If there are no formal channels to save money (like Bank), then
low income households are more likely to fall victim to fraudulent
schemes like Saradha chit fund in Bengal.

 IF everyone has bank account=> lowers the transaction costs,

paperwork and time. (Compared to counting currency notes,
maintaining records, manually recovering money vs cheque drop
box and so on.)

 Economic well-being of the poor people also ensures social

harmony, they’ll not fall into brainwashing by
Secessionist/Extremist elements in the society.
Traditional Branch in Rural India
 A traditional bank branch has high cost of operation – office rent,
staff salary, security guard, light bill, telephone bill etc. Even an
ultra-small branch will cost Rs 20-22 lakh per year.
 In rural area, most people will get No frills account / Basic savings
and deposits account= bank can hardly make any profit to make.

 Traditional bank branches have fixed working hours and bank

holidays. If a poor labourer wants to access his account, he’ll have
to waste 2-3 hours which directly affects his wage.
 Most villagers need loans less than Rs.5 lakh. In this type of small
loans, bank’s paperwork, loan default risk is high compared to the
profit/reward.
 Benefits they offer
 Service charges will come down.

 There may not be any requirement of minimum balance which

directly implies that the customer will not be forced to maintain a
minimum balance in their account.

 Competition that will arise as a result of these banks will benefit the
industry and society. (Eg RBI Rate Cut benefit)

 Payments bank will ensure more money comes into banking system.

 Payment banks may make handling cash a lot easier.

 Challenges they Face
 DUPLICATION OF EFFORT:
When the Nachiket Mor committee was set up back in 2013 and when it
submitted its findings in January, 2014, Mr Modi was not in power.
-On 15th August 2014, PM Modi launched the
Pradhan Mantri Jan Dhan Yojna (PMJDY) for
financial scheme.
-Under this scheme, everyone in the nation was to
get a basic bank account with an ATM card, life and
accident insurance.
-Thus, the basic purpose of the Payment banks was
fulfilled as a result of PMJDY.
- As a result, the scope of expansion of business for
these banks has become limited from the start.
 Continued
 ACCEPTANCE BY THE MASSES:
The big commercial government banks (SBI, PNB,
UBI etc) are much trusted by the society today.
These new payment banks will find it difficult to
earn the level of trust that the government sector
banks command today.

 COMPETITION FROM EXISTING BANKS:

As per RBI guidelines, 25% of all branches opened in
a year should be in rural areas. For newer banks this
quotation has been modified into “unbanked rural
areas”. Which means, there is a good chance that
the target audience of these banks has already
received the access to basic banking facilities.
 Growth
 Since payment banks are allowed to function as Business
Collaboration Agents (BCA) for big banks, they can co-ordinate
their efforts along with the bigger banks with the help of tie-ups
and achieve the goal of significantly improving financial
penetration in the country.

 Some of them have already tied up with existing licence holders.

- SBI, the country's largest lender, will take as much as 30 percent
in RIL's proposed bank.
- Bharti Airtel, India's largest telecom operator, plans to give 19.9
percent stake in the bank to Kotak Mahindra Bank Ltd.
- Aditya Birla Nuvo Limited has tied up with Idea Cellular which
will have 49 per cent stake in the joint venture.
 Impact on the Society
“Payment banks will change the way people think, change the
way they keep the money, where they keep their money, the way
they pay.” - Mr Arun Jaitley

 New Payment banks needs to introduce new products or new

applications, so that instead of cash, people start carrying out more
transactions electronically.
 Globally, that has been the trend. However, in India, although the
number of users of credit and debit cards have increased yet these
have been limited penetration on account of costs involved for
merchants or establishments which accept these cards.
 Mobile phone platforms still has lot of opportunity to penetrate
rural India with alternate methods for transactions.
 Conclusion
1. These banks would target those masses who cannot afford to
visit a branch for carrying out transactions (Eg: Daily wage
workers) by providing them basic banking facilities through
mobile platforms and appointing BCAs to carry out basic
activities.
2. They will leverage the huge volume of transactions for gaining
profit.
3. They will face challenges like any other venture but if successful,
the Payment Banks promise to change the banking scenario in
India and will allow the government to achieve its goal of
financial Inclusion. They will also offer competition to the
existing banks and more competition is good for the economy as
a whole.
Thank You!!