Small banks and payments banks--- for bank

source: BSC Chronicle, Feb 2015    thanks

Small banks and payments banks are intended to cover the unbanked and under-banked areas and increase banking penetration in the country. Payments banks can open small savings accounts and accept deposits of up to 1 lakh per individual  customer, and provide remittance services. These banks are allowed to issue ATM or debit cards but are not allowed to issue credit cards or lend in any form. They can also distribute non-risk-sharing simple financial products like mutual fund units and insurance products.

       Small banks, on the other hand, will be allowed to take deposits as well as lend money, the way other commercial banks do, but the focus will be on small lending. They can finance small business units, small and marginal farmers, micro and small industries and unorganized-sector entities. These do not face geographical restrictions on operations.

           Companies that are already present in the payments or finance space – such as prepaid payment issuers and non-banking finance companies (NBFCs)- are considering applying for the new licenses. For instance, ItzCash Card, FINO PayTech, Oxigen Services and Citrus Payment Solutions are planning to apply for payments bank licences. NBFCs such as Shriram Group, Muthoot Finance and Manappuram Finance want to enter the banking space and are studying the new guidelines to take a decision.

    The RBI has also allowed mobile telephone companies, supermarket chains and other companies and cooperatives to set up payments banks. Also, a company can form a joint venture with an existing scheduled commercial bank.

   Small banks and payments banks are expected to further the govt.’s aim of financial inclusion. With small savings and remittance services targeted at low-income households and the unorganized sector, this will help increase financial penetration and financial savings, and help bring the currently largely unorganized remittances and payment systems in India into the organized sector. According to World Bank estimates, only 35 per cent of India’s adult populations have accounts with financial institutions.

    Will payments banks be able to launch low-cost and innovative products? They will be able to generate revenue broadly in three ways – interest from deposit on SLR (statutory liquidity ratio), fee from distributing third-party products such as mutual funds or insurance, and from transaction fees on any payments. This ability to earn income should push the complaints to provide low-cost products to the end consumers.

    With the launch of these niche banks, the one-size-fits-all approach will come to an end in banking. Once the licenses are given, companies have a gestation period of 18 months.