The document discusses RBI's recent initiatives to promote inclusive and differentiated banking in India, including small banks and payments banks. Small banks can accept deposits and lend, but will focus on small farmers and unorganized sectors within a defined local area. Payments banks aim to facilitate savings accounts and payments/remittance services for low-income groups. Eligible promoters include existing non-banking companies and telecom firms. Both small and payments banks are subject to capital requirements and regulations on activities. The goal is to increase access to basic banking services in underserved areas through localized and technologically-driven operations.

1. Small Banks and Payments Banks: An
Inclusive Banking Initiative of RBI
-B.V.Raghunandan
PG Department of
Economics,
St.Aloysius College,
Mangalore
August 7, 2014

2. Background
• RBI wanted an alternative to money-
lending and NBFCs
• Nationalisation of banks was a part of
it
• Micro-finance -Bangla Desh Grameena
Bank - Muhammad Yunus winning the
Nobel Prize
• SHG was roped in as a part of delivery
mechanism of micro-finance
• Bank Correspondent and Business
Correspondent Systems
• Post Offices & Core Banking

3. The Effect of RBI Efforts
• Limited Success made
possible by technology
particularly through ATMs
• Banking remained an elite
concept with Andheri in
Bombay not having a branch
until Indian Bank opened a
branch in 2011 whereas
Nariman Point got branches
centuries ago
• Established banks were a
failure, successful only in
rolling out impressive
statistical data

4. Inclusive Banking
• Definition of “inclusivity” by
OECD-WB Conference on
Challenges and Policies for
Promoting Inclusive Growth:
“The degree to which economic
opportunities are shaped by
individual skill, ideas, and
initiative rather than by familial
wealth, political influence, and
social connections”.

5. Current Initiative
• Presenting the Union budget, 2014-2015
on July 10, 2014, the Finance Minister,
Arun Jaitley announced that:
“RBI will create a framework for licensing
small banks and other differentiated
banks. Differentiated banks serving niche
interests, local area banks, payment
banks etc. are contemplated to meet
credit and remittance needs of small
businesses, unorganized sector, low
income households, farmers and migrant
work force”.

6. Follow-up by RBI
• July 17, 2014-RBI wants to promote differentiated
banking and niche banking
• In unserved and underserved population
• Covering the underprivileged and small and
neglected segment of the
society regarding savings,
small loans and small
remittances
• guidelines for setting up
Small Banks and Payment
Banks

7. Small Banks
• A small bank will be allowed to accept
deposits as well as lend
• operations will be restricted to a select
category of customers, such as small
farmers and unorganised sector entities.
• operations will be limited to a well-
defined area geographically, such as a
State or a Union Territory, to give a very
“local feel.”
• a small bank can be set up with an initial
capital of at least ₹100 crore
• Resident individuals/professionals with 10
years of experience in banking and
finance, companies and societies will be
eligible to set up small banks.
• existing NBFCs, Micro Finance Institutions
(MFIs), and Local Area Banks can also opt
for conversion to small banks, the RBI
said.

8. Operations of Small Banks
• Full Technology Absorption for cost saving and fast
delivery of services
• Aim will be to provide savings
instruments to the “un-served
and under-served” sections of the population
• give loans to small farmers, micro and small
enterprises, and other un-organised sector
businesses, the RBI said
• Local focus and the ability to serve smaller
customers will be the key criteria in licensing such
banks

9. Regulation of Small Banks
• mandatory for small banks to maintain a capital adequacy of
15 per cent of its risk weighted assets on a continuous basis
• the small bank will be subject to all regulations of RBI as
applicable to existing commercial banks, including the
maintenance of Cash Reserve Ratio and Statutory Liquidity
Ratio.
• the promoters’ initial contribution should be at least 40 per
cent of the bank’s total
paid-up capital
• At least 50 per cent of its loan
portfolio should constitute loans and
advances of size up to ₹25 lakh to
extend loans primarily to
micro enterprises,

10. Payments Banks
• Objective: (i) small savings accounts and
(ii) payments / remittance services to migrant labour
workforce, low income households, small businesses, other
unorganised sector entities and other users
• enabling high volume-low value transactions in deposits and
payments / remittance services in a secured technology-driven
environment

11. Eligible Promoters
• The existing non-banking PPI issuers and 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.
• Even banks can take equity stake in a Payments Bank to
the extent permitted the Banking Regulation Act, 1949.

12. Capital of Payments Bank
• the minimum paid up voting
equity capital of the Payments
Bank isRs. 100 crore
• The Payments Bank shall be
required to maintain a minimum
capital adequacy ratio of 15 per
cent of its risk weighted assets
(RWA) on a continuous basis
• The promoter’s minimum initial
contribution to the paid up
voting equity capital of Payments
Bank shall be at least 40 per cent
which shall be locked in for a
period of five years

13. Scope of Activities
• Acceptance of demand deposits, i.e., current deposits, and
savings bank deposits restricted to holding a maximum
balance of Rs. 100,000 per customer.
• Payments and remittance
services through various
channels including branches,
BCs and mobile banking
• Issuance of Pre-Payment
Instruments
• Internet banking
• Functioning as Business Correspondent (BC) of other banks –
A Payments Bank may choose to become a BC of another
bank for credit and other services which it cannot offer.

14. Operational Details
• The Payments Bank will be
required to use the word
“Payments” in its name
• The Payments Bank will be
registered as a public limited
company under the Companies
Act, 2013, and licensed under
the Banking Regulation Act, 1949
• Maintain Cash Reserve Ratio (CRR)
• Invest all its monies in Government
securities/Treasury Bills with maturity up to one year that are
recognized by RBI as eligible securities for maintenance of
Statutory Liquidity Ratio (SLR)
• The operations of the bank should be fully networked and
technology driven from the beginning.

15. THANK YOU