In order to expedite financial inclusion, Finance Minister Arun Jaitley in his last budget speech (July,2014) had said that RBI will create a framework for licensing Payments Banks / Small Banks and other differentiated 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 (Reserve Bank of India) 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)
The applicants, who include Telecom companies (like Bharti – Airtel), Big conglomerates (Birla group, Reliance & Future group), Mobile wallet providers, Pre-paid card firms like ITzCash, Department of posts (India Post), Micro Finance companies, Non-Banking Finance Companies (NBFCs) and several others. (State Bank of India is teaming up with Reliance & Bharti with Kotak Mahindra Bank).
So, what are these Payment Banks / Small Banks? Why do these companies want to set up Banks? What are the guidelines given by RBI? What are the benefits of setting up Payments Banks and Small Banks?
Latest News (19-Aug-2015) : RBI grants in-principle nod to 11 companies for Payments Bank licence. Name of the applicants that have received nods are – 1) National Securities Depository Limited (NSDL), 2) Reliance Industries, 3) Aditya Birla Nuvo, 4) Airtel M Commerce, 5) Department of Posts, 6) Fino Paytech, 7) Tech Mahindra, 8) Vodafone m-pesa, 9) Cholamandalam Distribution services, 10) Paytm and 11) Sun Pharma.
Latest News (16-Sep-2015) : RBI grants in-principle nod to 10 Small Banks’ applicants. The selected Applicants are as below :
- Au Financiers (India) Limited, Jaipur
- Capital Local Area Bank Limited, Jalandhar
- Disha Microfin Private Limited, Ahmedabad
- Equitas Holdings P Limited, Chennai
- ESAF Microfinance and Investments Private Limited, Chennai
- Janalakshmi Financial Services Private Limited, Bengaluru
- RGVN (North East) Microfinance Limited, Guwahati
- Suryoday Micro Finance Private Limited, Navi Mumbai
- Ujjivan Financial Services Private Limited, Bengaluru
- Utkarsh Micro Finance Private Limited, Varanasi
Latest News (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.
Latest News (23-Nov-2016) : India’s first Payment Bank to go Live – Airtel launches India’s first Payment bank services with 7.25% interest on savings accounts in Rajasthan (Pilot project). Airtel mobile number will be the bank account number. Personal Accidental Insurance of Rs 1 Lac with every Savings Account will be provided.
What is the main objective of a Payments Bank?
Let us consider an example – You pay salary to your Car driver in cash because he does not have a bank account. Individuals like him generally send money to his family members (who might be residing in his native place, a small village) through known people or he may use Money-order facility to remit the cash. But, more and more people like him are becoming mobile phone savvy. The payments Banks applicants will look to unbanked people like your car driver as low-hanging fruit to harvest as their first customers.
(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)
Don’t get surprised if your neighborhood supermarket or even your mobile phone can soon be doubled up as a Bank.
So, the main objective of Payments Banks is to increase financial inclusion (to get more people into the banking system) by providing Small Savings Accounts, Payment or remittance services to low income households / labour, small businesses etc.,
Payments banks will provide basic banking services to people who currently do not have a bank account, including millions of migrant workers. Almost half of India’s population is unbanked.
These banks will aim at providing high volume-low value transactions in deposits and Payments / remittance services in a secured technology-enabled environment.
What is the main objective of a 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.
RBI’s guidelines for Payments 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. (Based on performance, the RBI could enhance this limit)
- They cannot issue Credit Cards.
- Payment Bank can not undertake Lending activities. They should not offer loans.
- 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.
RBI’s 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.
- 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.
- 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.,)
Why do we need Payments Banks & Small Banks? (Advantages / Benefits / Challenges)
- As discussed above , payments bank allow you to only open savings and current accounts. But doesn’t a normal bank allow you to do that even now? Yeah, but the difference is a payments bank can now be your mobile service provider, supermarket chain or a non-banking finance company. (Bharti Airtel, with 20 crore subscribers, has nearly the same number of customers as State Bank of india. The transactions done through mobile wallets have tripled over the last two years to Rs 2,750 crore.)
- Payment banks may make handling cash a lot easier. For example, you can transfer money using your mobile phone to another bank or to another mobile phone holder and also receive amounts through your device. Or you can transfer the amount to point-of-sale terminals at large retailers and take out cash.
- Payment banks will pay interest rate on savings accounts. (Rates are not yet specified by RBI)
- The deposits are covered by the DICGC (Deposit Insurance & Credit Guarantee Corporation), like your Bank Fixed Deposits. (Read my article to understand more about Deposit Insurance)
- Payments Banks will be regulated by RBI.
Payments Banks cannot lend money (A bank generally earns a spread on the money it lends out from the money it takes in as a deposit). So, to make money and be profitable, they have to charge its customers for the transactions that are executed through them. Will low-income households, who are the main targets of these Payments Banks accept the charges (or reduced remittances)? I believe, competition can dramatically reduce transaction costs over a period of time. This will be a volume based business. The RBI has recommended the payment banks to invest extensively in technology so that all transactions go through seamlessly and at low cost.
(The $7.69 billion Indian e-commerce industry is expected to grow to $17.52 billion by 2017 and around 70% of the business is based on the cash-on-delivery model. This may change in future after the entrance of Payment Banks)
The basic tenets for a successful payment bank will be : ‘high quality – low cost of delivery’, regular education / incentivize and encourage its customers to do cash-less transactions, and a robust technological framework. Essentially the cost of transactions, for a payment bank, needs to be significantly lower of a traditional branch-based banking model.
Many people in rural areas lend or deposit their hard-earned monies with money lenders and financiers. Chit funds are also very popular. The main reason for all these things is that they do not have access to banks. Small Banks can change this scenario. (The rural branches of Indian banks have declined from 54% of total branches in 1994 to 37% in 2013)
Also, we need more intense competition in the Indian Banking sector. Recently, RBI had cut the key policy rates. But, bank customers have not yet benefited from these interest rate cuts. Most of the banks have not yet passed on the benefits to its customers. However, they are fast enough to reduce deposits rates though.
Currently the below mentioned Small Finance Banks and Payment Banks has started banking operations:
Small Finance Banks
- Ujjivan Small Finance Bank.
- Janalakshmi Small Finance Bank.
- Equitas Small Finance Bank.
- A U Small Finance Bank.
- Capital Small Finance Bank.
- ESAF Small Finance Bank.
- Utkarsh Small Finance Bank.
- Suryoday Small Finance Bank.
- Fincare Small Finance Bank.
- Paytm Payment Bank.
- Airtel Payment Bank.
- India Post Payment Bank.
- Fino Payment Bank.
RBI has not said how many licenses it will issue in each category (Payment Banks & Small Banks). We need to wait and see how many will get the license. RBI is expected to be liberal in issuing the licenses.
Do you think Payments banks and Small Finance Banks in the Private Sector will be successful? Do you agree that ‘ease of use & convenience’ may work in favor of Payment Banks? Will they intensify competition in the Indian Banking Sector? Do share your views.
(Image courtesy of [Stuart Miles] / FreeDigitalPhotos.net) (Read my article “RBI cuts Interest rates – Impact on your Home Loan.”)