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Small & Payment Banks: Future of Local Banking

The Reserve Bank of India has proposed major reforms in banking sector with issue of draft guidelines for setting up “Small and Payment Banks” which will cater to marginalized sections of the Society, including migrant laborers, for collecting deposits and remitting funds.
These banks will provide a whole suite of basic banking products such as deposits and supply of credit, but in a limited area of operation. The payments banks will offer a limited range of products such as acceptance of demand deposits and remittances of funds. They will have a widespread network of access points particularly in remote areas, either through their own branch network or through Business Correspondents (BCs)/agents or through networks provided by others.
Ø  The existing non-bank pre-payment instrument issuers, non-banking finance companies (NBFCs), corporate BCs, mobile telephone companies, super-market chains, companies, real sector cooperatives and public sector entities may apply to set up a payments bank.
Ø  In case of small banks, resident individuals with 10 years of experience in banking and finance, companies and Societies will be eligible as promoters to set up small banks. NBFCs, micro finance institutions (MFIs), and Local Area Banks (LABs) can also opt for conversion into small banks.
Small Banks-
Ø  The objective for these Small Banks is to increase financial inclusion by provision of savings vehicles to under-served and un served 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. Local focus and the ability to serve smaller customers will be a key criterion in licensing such banks
Ø  The area of operations would normally be restricted to contiguous districts in a homogenous cluster of states of union territories so that the Small Bank has a ‘local feel’ and culture. 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.
Ø  In view of concentration of area of operations, the Small Bank would need a diversified portfolio of loans, spread over it area of operations.
Payment Banks-
Ø  Objective of payments banks is to increase financial inclusion by providing small savings accounts, payment/remittance services to migrant labour, low income households, small businesses, other unorganised sector entities and other users by enabling high volume-low value transactions in deposits and payments/remittance services in a secured technology-driven environment.
Ø  Payments Banks can accept demand deposits (only current account and savings accounts). They would initially be restricted to holding a maximum balance of Rs 100,000 per customer. Based on performance, the RBI could enhance this limit.
Ø  No credit lending is allowed for Payments Banks
Ø  The float funds can be parked only in less than one year Government Securities
                    Brief Summary:
Particulars
Small Banks
Payment Banks
Eligible Entity
NBFC, MFI, Cos. Societies, resident individuals or professionals with 10 or more years of experience
Pre-payment issuers, NBFC, Corporates, telecom cos, super markets, real estate cos. & co-operatives
Capital
INR 100 Crore
INR 100 Crore
Permitted Activity
Collect deposits and lend to farmers, small businesses and industries, unorganized sector
Payment & remittance services, demand deposit products to small biz & low income households
Statutory Compliance
Maintain CRR, SLR & 15% capital adequacy as per Basel I norms
Maintain CRR and investment money in Government sector
Promoter Holding
It should be lowered to below 40% in 3 years and 26% in 12 years
It should be lowered to below 40% in 3 years and 26% in 12 years
FDI
As per FDI policy
As per FDI policy


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