On Wednesday, the Reserve Bank of India (RBI) gave in-principle approval to 11 entities to open a new category of banks, ‘payment banks’ as part of the government’s bid to increase financial inclusion and help expand banking services. Payment banks, targetted towards people without access to the formal banking system, will provide savings, deposit, payment and remittance services. Unlike conventional banks, payment banks will not be in the business of lending. Essentially, these banks are targeted towards financially excluded customers like migrant workers, low-income households and small businesses. The list of 11 entites includes nine organisations, including Aditya Birla Nuvo Ltd, Airtel M Commerce Services Ltd, Cholamandalam Distributions Ltd, Reliance Industries Ltd, Tech Mahindra Ltd, Vodafone m-Pesa Ltd, Fino Pay Tech Ltd, Department of Posts and National Securities Depository Ltd (NSDL). Two individuals, Dilip Shanghavi, founder of Sun Pharmaceutical Industries Ltd, and Vijay Shekhar Sharma, founder of One97 Communications Ltd that runs mobile payment company PayTM, were also included in the list.

Hailed for their disruptive, almost Uber-like effect on the banking industry, the newly licensed payment banks will join India’s vast banking system, which has several layers of banks, performing different roles and objectives, once they full criteria laid down by RBI in 18 months.

Commercial Banks

According to the RBI, “Commercial Banks refer to both scheduled and non-scheduled commercial banks which are regulated under Banking Regulation Act, 1949." Commercial banks operate on a ‘for-profit’ basis. They primarily engage in the acceptance of deposit and extend loans to the general public, businesses and the government.

Scheduled Banks

By definition, any bank which is listed in the 2nd schedule of the Reserve Bank of India Act, 1934 is considered a scheduled bank. The list includes the State Bank of India and its subsidiaries (like State Bank of Travancore), all nationalised banks (Bank of Baroda, Bank of India etc), regional rural banks (RRBs), foreign banks (HSBC Holdings Plc, Citibank NA) and some co-operative banks. These also include private sector banks, both classified as old (Karur Vysya Bank) and new (HDFC Bank Ltd).

To qualify as a scheduled bank, the paid up capital and collected funds of the bank must not be less than Rs5 lakh. Scheduled banks are eligible for loans from the Reserve Bank of India at bank rate, and are given membership to clearing houses.

Non-scheduled Banks

Non-scheduled banks by definition are those which are not listed in the 2nd schedule of the RBI act, 1934. Banks with a reserve capital of less than 5 lakh rupees qualify as non-scheduled banks. Unlike scheduled banks, they are not entitled to borrow from the RBI for normal banking purposes, except, in emergency or “abnormal circumstances." Jammu & Kashmir Bank is an example of a non-scheduled commercial bank.

Co-operative Banks

Co-operative banks operate in both urban and non-urban areas. All banks registered under the Cooperative Societies Act, 1912 are considered co-operative banks. These are banks run by an elected managing committee with provisions of members’ rights and a set of “communally developed and approved bylaws and amdendments."

In the urban centers, they mainly finance entrepreneurs, small businesses, industries, self-employment and cater to home buying and educational loans. Likewise, co-operative banks in the rural areas primarily cater to agricultural-based activities, which include farming, livestocks, dairies and hatcheries etc. They also extend loans to small scale units, cottage industries, and self-employment activities like artisanship.

Unlike commercial banks, who are driven by profit, co-operative banks work on a “no profit, no loss" basis. These are regulated by the Reserve Bank of India under the Banking Regulation Act, 1949 and Banking Laws (Application to Co-operative Societies) Act, 1965.

Regional Rural Banks

Regional Rural Banks or RRBs, simply put, serve the rural areas and agricultural sectors with basic banking and adequate financial services. They were set up in 1975, based on the recommendations of a committee. Based in Moradabad, Prathama Bank, established on 2 October 1975, is the first RRB to open in India. It was sponsored by Syndicate Bank. The RRBs are owned by the central government (50%), the state government (15%) and the sponsor bank (35%). Several commercial banks have sponsored RRBs. Prominent examples include the Maharashtra Gramin Bank (sponsored by the Bank of Maharashtra) and the Himachal Gramin Bank (sponsored by Punjab National Bank). RRBs were set up to eliminate other unorganized financial institutions like money lenders and supplement the efforts of co-operative banks.

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