Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

Small, payments banks in the making

These are niche banks that are expected to cover unbanked and under-banked sections of the society

Paving the way for niche banking, the Reserve Bank of India (RBI) on 17 July issued draft guidelines for two new categories of banks—small and payments. RBI states that these can enhance financial inclusion.

At the moment, there are commercial banks—public, private and foreign—which provide a full range of services to retail customers, small and medium enterprises, industries, low-income groups and high net worth individuals. Then there are cooperative and local area banks that provide banking services.

Mint Money explains everything there is to know about small and payments banks and how they are different from other banks.

Small in size, big on intent

Small banks will be smaller in size and operations compared with existing commercial banks. And these will offer both deposits as well as loan products. But unlike existing commercial banks, these will be limited to basic products.

Also, they will have operations in limited areas, say in a single state at the initial stage. These banks will be extensively operated on technology, especially to reduce operational costs. They will not deal with sophisticated products. RBI states that small banks will act as a savings vehicle to the under-served and unserved sections of the society. Hence, target customers will be micro and small enterprises, agriculture, and unbanked and under-banked population.

According to the draft guidelines, at least 50% of a small bank’s loan portfolio should constitute loans and advances of up to 25 lakh. Which means loans will be smaller in size.

Easier payments

Payments banks will be used only for transaction purposes and for deposits. Unlike small banks, payments banks can’t lend money to people. The idea of payments banks was first proposed by the Nachiket Mor committee on financial inclusion. Hence, payments banks will offer only a limited range of products such as acceptance of demand deposits and remittance of funds. According to RBI, the primary objective of setting up such banks is to extend financial inclusion by providing small savings accounts and payment or remittance services to migrant labourers, low-income households, small businesses, unorganized sector entities and other such users. In terms of network, payments banks are expected to have access points particularly in remote areas. For a payments bank, the access point can be its own branch, business correspondents (BCs) or other network partners. Just as small banks, technological solutions to lower costs will be the key for payments banks as well. A payments bank should enable high-volume and low-value transactions in deposits and payment or remittance services in a secured technology-driven environment. Like all other bank deposits, deposits in these banks, too, would be covered under the deposit insurance scheme of the Deposit Insurance and Credit Guarantee Corp. of India (DICGC), a wholly owned subsidiary of RBI. As of now, at least 2,199 banks are insured by DICGC. Each deposit in the new banks will be insured up to a maximum of 1 lakh for both principal and interest amount. As per the guidelines, payments banks will be restricted to hold a maximum balance of 1 lakh per customer.

Who can apply?

According to RBI’s draft guidelines, entities that can apply to become a payments bank include non-bank pre-paid payment instrument issuers, non-banking financial companies (NBFCs), corporate BCs, mobile telephone companies, supermarket chains, companies, real sector cooperatives and public sector entities. A payments bank can also become a BC of another bank for credit and other services which it cannot offer. Hence, as BCs they will be able to offer other bank products such as loans and deposits.

Those eligible to set up a small bank include resident individuals with 10 years of experience in banking and finance, companies and societies, NBFCs, microfinance institutions and local area banks.

Some are already looking at the viability of setting up such banks. “We are looking at exploring the opportunity. However, we still have to figure out how viable the business model is. For us, it is convenient to open a bank since we already have presence in the locations where RBI wants the differential banks to be. With this we will see more innovation and local products in the market," said Rishi Gupta, chief operating officer at Fino PayTech Ltd, a banking correspondent.

Small NBFCs will be interested in becoming a small bank, says I. Unnikrishnan, executive director and deputy chief operating officer, Manappuram Finance Ltd. “For consumers, it will be like a local institution and people with small savings will benefit. Technology will play a big role in reducing cost for small banks," he added.

The minimum paid-up capital requirement of both payments banks and small banks is 100 crore. The payments bank will have to invest in government securities with a maturity of up to one year.

What’s in it for you?

Payments and small banks are niche banks that are expected to cover the unbanked and underserved population. According to World Bank estimates, only 35% of India’s adult population have accounts with financial institutions.

“As per the draft guidelines, RBI’s core intention is to reach the underserved. People who have migrated and send money home are set to benefit the most. Payments banks will create the infrastructure which will provide access points to send and take out cash. As of now, people send money from cities to rural areas through post offices or third-party channels. Normally, this costs a lot of money and time. With payments banks, these people will get access to instance cash transfer and will be cost effective too. We would consider applying for a payments bank licence," said Pramod Saxena, founder and managing director, Oxigen Service (India) Pvt. Ltd, a prepaid payment instrument issuer.

Others, too, are of the same opinion. “We find it as a progressive move by RBI. With payments banks coming in, you will see innovations and consumers will benefit in terms of every day transactions. Remittance will become simpler and convenient. It will also open doors to sell spot loan products to the unbanked population," said Satyen V. Kothari, managing director and founder of CitrusPay, a prepaid instrument issuer.

With the draft guidelines for these banks out ( http://tinyurl.com/mn5qgfv ), RBI has sought feedback from the public by 28 August 2014.

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