V. Differentiated Banking

With differentiated banks such as small finance banks (SFBs) and payments banks (PBs) commencing operations in 2016-17, the Reserve Bank has started exploring the scope of setting up wholesale and long-term finance (WLTF) banks focused primarily on lending to infrastructure sector and small, medium and corporate businesses. The Discussion Paper of April 2017 envisions the role for WLTF banks to include mobilising liquidity for banks and financial institutions through securitisation, acting as market makers, providing refinance to lending institutions, and operating in capital markets as aggregators. The envisioned heterogeneous banking structure will complement and compete with universal banking institutions and enhance financial inclusion while meeting the diverse credit needs of a growing economy.

Modes of Differentiated Banking and Latest Developments

1. Payment Banks

• On 19 August, 2015, the Reserve Bank of India gave in-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 Regulation Act of 1949 allows. These activities include acceptance of deposits, payments and remittance services, internet banking and function as business correspondent of other banks. Initially, they are allowed to collect deposits up to Rs 1 lakh per individual.

2. Small Finance Banks

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

Activities Allowed

• 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

Activities Disallowed

• 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.