Payment banks and Small Finance Banks- new entrants to the banking sector

The RBI introduced a new concept of niche banking in India.  In Nov 2014  it issued final norms for Payment banks and Small  Finance banks that would allow mobile firms and supermarket chains, among others, to enter the banking arena to cater to individuals and small businesses. The aim behind these is to provide financial inclusion to sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganized sector entities. As a sequel to this, recently Airtel has launched India’s first live payments bank followed by Paytm . India Post Payments Bank is the third entity to receive payments bank permit.

The big question is what are Payment banks and Small Finance Banks and how are they different from each other. A quick look below attempts to bring out the difference between the two.

Payment Banks:

•  OBJECTIVE : Provide small savings accounts and payments /remittance services to migrant labour workforce and low-income households
• ELIGIBLE PROMOTERS : Individuals or professionals with necessary experience and eligibility, existing NBFCs, corporate banking correspondents, mobile companies, supermarket chains, real estate co-ops and corporate entities.
•  SCOPE OF ACTIVITIES:

*Accept deposits but customer balance should not exceed Rs.1 Lakh

*Cannot give loans, can issue ATM/Debit card but no credit cards

*Can distribute non-risk simple financial products such as mutual funds and insurance products

*Payments banks will allow last mile connectivity; they will make banking available in remote areas that are not serviced by bank branches currently. For this, payments banks are expected to piggy-back on their existing retail or other networks.

*The operations of the payments banks will be fully networked and technology driven from the beginning.

Author:

Prof. Ravinder Bhatia

Asia-Pacific Institute of Management