Payment Banks

On 19 August, 2015, the Reserve Bank of India gave a principle nod to 11 private parties to set up “payment banks. A payment bank is a differentiated bank that will undertake only certain restricted banking functions that the Banking Regualtion Act of 1949 allows. These activities include acceptance of deposits, payments and remittance services, internet banking and function as businescorrespondant of other banks. Initially, they are allowed to collect deposits up to Rs 1 lakh per individual.

Small Financial Banks

Reserve Bank of India (RBI) on September 15, 2016 granted in-principle licence for small finance banks to ten entities.

Here is what they will and won’t be allowed to do:

Can Do:

• Undertake basic banking activities of acceptance of deposits and lending
• Can lend only for financial inclusion including small business units, small and marginal farmers, micro and small industries and unorganised sector entities
• Allowed to distribute mutual fund products, insurance products and pension products

Can’t Do:

• Not allowed to set up subsidiaries to undertake non-banking financial activities
• Other financial and non-financial services activities of the promoters should not be mingled with the working of the bank

How it is Different from Payment Banks

Unlike the payments banks, which can take deposits but not provide credit except to the government, the small finance banks are essentially scaled down versions of commercial banks, with both deposit-taking and loan-making functions. They are required to provide at least 75% of their loans to borrowers classified as priority sector and at least 50% of their loans must be below Rs 75 lakh.

Unlike the licensees for the payments banks, which was quite a heterogeneous group comprising telecom companies and prepaid instrument providers among others, this group is relatively homogeneous, mostly comprising non-banking financial companies in the microfinance sector. Going by the basic motivations for setting up these new categories of organisations, this is an entirely logical distinction.

RBI Unveils Norms for ‘On Tap’ Bank Licences

As part of its plan to put universal bank licences ‘on tap’, the Reserve Bank of India unveiled draft guidelines on May 5, 2016.

What is ‘On Tap’ Licenses

• The central bank has been opening the bank licence window only periodically.
• Under the ‘on tap’ mechanism, however, an application can be made at any time subject to certain conditions.
• The most significant implication of the draft norms announced by the Reserve Bank of India for granting banking licences ‘on tap’ is that the issue of when to expand banking services in the market will now be taken by those investing in setting up a new bank, rather than the RBI.
• Provided an entity meets the norms specified, the RBI will grant the licence.
• This in itself should significantly alter both the competitive landscape as well as customer experience in banking, as the expansion of services — which is what the entry of new players implies — will be driven by market forces, rather than regulatory wisdom.