Sunday, February 8, 2015

Small and Payment Bank

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Small Banks

The objectives of setting up of Small Banks are to further financial inclusion, by providing -

  • Provision of savings facilities to under-served and un-served sections of the population
  • Supply of Credit to small business units, small farmersmicro and small industries, and other unorganized sector entities, in their limited area of operations, through high technology - low cost operations
Activities of Small Banks -
  1. The area of operations of the small bank will normally be restricted to contiguous districts in a homogenous cluster of states/UTs so that the bank has the 'local feel' and culture. Branch expansion for first 3 years, need RBI's prior approval.
  2. Primarily undertake basic banking activities, like acceptance of deposits and lending to small farmers, small businesses, micro and small industries and unorganized sectors. 
  3. It can also undertake other simple financial activities with the prior approval of RBI.
  4. It cannot set up subsidiaries to undertake non-banking financial services (NBFC) activities.
Capital Requirements -
The minimum paid-up capital is Rs. 100 crore

Funds Deployment -
In view of the inherent risk (since it can lend) of a small bank, it shall be required to maintain a minimum Capital Adequacy Ratio (CAR) of 15 % of its Risk Weighted Assets (RWA) on a continuous basis. However, as small banks are not expected to deal with sophisticated products, the CAR will be computed under simplified Basel I standards.


Payments Bank
The objectives of setting up of Payments Banks are to further financial inclusion, by providing -

  • Small Savings accounts
  • Payments / remittance services to migrant labor workforce, low income households, small businesses, other unorganized sector entities and other users.
Activities of Payment Banks -
  1. They can accept Demand Deposits, but will initially be restricted to hold a maximum balance of Rs. 1,00,000 per individual customer
  2. Issuance of ATM / Debit Cards, but they cannot issue Credit Cards
  3. Payments and remittance services through various channels
  4. They can act as Business Correspondents (BC) of another bank (following RBI guidelines)
  5. Distribution of non-risk sharing simple financial products, like Mutual Funds (MF) units and insurance products, etc.
  6. They cannot undertake lending activities (means cannot disburse loans)
Capital Requirements -
The minimum paid-up capital is Rs. 100 crore.

Funds Deployment -
Apart from amounts maintained as Cash Reserve Ratio (CRR) with RBI, it will be required to invest minimum 75 % of its demand deposits in Statutory Liquidity Ratio (SLR) eligible government securities / T-bills with maturity up to 1 year, and hold maximum 25 % in current and time/fixed deposits with other Scheduled Commercial Banks (SCBs) for operational purposes and liquidity management.


Small Banks vs. Payment Banks
  1. Small Banks can accept demand and time deposits from public as commercial banks do (Savings, Current, Fixed, Recurring deposits, etc.)
    But, Payment Banks can take only demand deposits (Savings and Current deposits), and cannot issue Credit cards (however, can issue Debit cards)
  2. Small Banks can give loans only to small business units, small farmersmicro and small industries, and other unorganized sectors, but not to large industries.
    But, Payment Banks cannot give any type of loans to public, but can invest in government securities or T-bills.
  3. The target of Small Banks is to supply credit to small business units, small farmersmicro and small industries, and other unorganized sector entities, in their limited area of operations. And provisions for savings for poor people.
    The target of Payment Banks is payments / remittance services to migrant labor workforce, low income households, small businesses, other unorganized sector entities, and savings for poor people.

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