Payment Banks & Small Finance Banks: A Step Towards Inclusive Economy Rajeev Awasthi

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1 Introduction Payment Banks & Small Finance Banks: A Step Towards Inclusive Economy Rajeev Awasthi Assistant General Manager, IDBI Bank Ltd, Bhopal, rajeev.awasthi.in@gmail.com Current Status of Financial Inclusion The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little. -Franklin D Roosevelt Financial Inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. Financial products and services are identified as basic banking services like deposits accounts, loans, access to payment, remittance facilities and also life and non-life insurance services. An inclusive financial system facilitates efficient allocation of productive resources and thus can potentially reduce the cost of capital. An all inclusive financial system enhances efficiency and welfare by providing avenues for secure and safe saving practices and by facilitating a whole range of efficient financial services like easy day to day management of finances, safe money transfer etc. The Government of India as well as the banking industry has recognized this imperative and has undergone certain fundamental changes over the last two decades. In fact, in order to address the issues of financial inclusion, the Government of India constituted a Committee on Financial Inclusion under the chairmanship of Dr. C Rangarajan. Not only in India, but Financial Inclusion has become an issue of worldwide concern, relevant equally in economies of the underdeveloped, developing and developed nations of the world. Building an inclusive financial sector has gained growing global recognition bringing to the fore the need for development strategies that touch all lives instead of a select few ones. Position of Availing Banking Services Total As per Census 2001 As per census 2011 availing Banking Services Percentage (%) Total availing Banking Services Percentage (%) Rural 138,271,559 41,639, % 167,826,730 91,369, % Urban 53,692,376 26,590, % 78,856,937 53,444, % Total 191,963,935 68,230, % 246,692, ,814, % VOLUME 3, ISSUE 1, MARCH

2 Payment Banks Payments Banks are those banks which provide payment solutions. They can accept deposits up to Rs 1 lakh and provide payments, remittance service and third party transactions. They cannot issue credit cards and most importantly cannot lend money. On 19 th August 2015, the RBI had given in-principle licenses to11 entities: 1. Aditya Birla Nuvo 2. Airtel M Commerce Services 3. Cholamandalam Distribution Services. 4. Department of Posts 5. FINO Pay Tech 6. National Securities Depository 7. Reliance Industries 8. Dilip Shanghvi,Sun Pharmaceuticals 9. Vijay Shekhar Sharma, Paytm 10. Tech Mahindra 11. Vodafone M-Pesa Out of these 11, three entities namely Tech Mahindra, Cholamandalam Distribution Services and Dilip Shanghvi s Sun Pharmaceuticals have withdrawn application of Payment Banks. Small Finance Banks It is a type of niche Bank, which can provide basic banking services like accepting deposits and lending but mainly focusing on small businesses.small Finance Banks can perform all the operations of normal commercial banks but at a smaller level targeting low-income segment or lowest strata of the society for the purpose of financial inclusion and boasting saving habits. 50% of the lending should be given to borrowers who come under priority sector lending as specified by RBI. Minimum 75% of loan should be given to small borrowers with exposure less than Rs. 25 lakhs. On 16 th September 2015 RBI had given in principle nod to 10 Small Finance Banks out of 72 participants applied for license to start the Small Finance Banks namely:- 1. AU Financiers (India)Ltd, Jaipur. 2. Capital Local Area Bank Ltd, Jalandhar. 3. Disha Micro fin. Private Ltd, Ahmedabad. 4. Equitas Holdings Private Ltd, Chennai. 5. ESAF Microfinance and Investments Private Ltd,Chennai. 6. Janalakshmi Financial Services Private Ltd, Bengaluru. 7. RGVN (North East)Microfinance Ltd, Guwahati. VOLUME 3, ISSUE 1, MARCH

3 8. Suryoday Microfinance Private Ltd, Navi Mumbai. 9. Ujjivan Financial Services Private Ltd, Bengaluru. 10. Utkarsh Micro Finance Private Ltd, Varanasi Difference between Payment Banks and Small Finance Banks Parameter Payments Banks Small Finance Banks 1 Criterion for applicants 2 Capital Requirement 3 Scope of Activity (A) Liability (B) Assets (C) Third party product distribution 4 Branch Network 5 Capital Requirement Card Issuers, Business Correspondents, Retailers, Cooperatives, Professionals, NBFC's,Telecom Companies, Supermarket chains etc. Minimum Capital Requirement is INR 100 Crore. Payment Banks can offer deposits and hold maximum balance /deposit upto Rs 1 lakh per customer,issue ATM/Debit cards, payments and remittance services. Payment Banks cannot undertake lending activities and issue credit cards. Can act as distributor of third party products (insurance,mutual funds). Payment Banks are exempted from the requirement of having a base branch for a certain number of business correspondents (BC's)/access points managed by BC's. 7.5% tier I and 7.5% in Tier II. Professionals with 10 years of experience in Banking /Finance/Microfinance Institutions. Minimum Capital Requirement is INR100 Crore. The Bank shall primarily undertake basic banking activities of accepting deposits and lending to small farmers, small business, micro and small industries and unorganized sector entities. 75% of the advance should be given to priority sector which includes agriculture and small business. Half of the loans portfolio of the bank should be of up to Rs 25 Lakhs. Can act as distributor of third party products. Small Finance Banks can have their own branches managed by their employees operating as access points or may engage other entities/persons to manage the access points. 7.5% in both Tier I and Tier 6 Promoters contribution 40% for the first five years 40% and gradually brought VOLUME 3, ISSUE 1, MARCH II.

4 from the commencement of down to 26 % within12 years its business. from date of commencement of business of the bank. 7 Branch Authorization Policy Need Approval to open access points for the initial five years. After the initial stabilization period of five years and after a review,rbi may liberalize the requirement of prior approval. Small Finance Banks should follow the extant instructions pertaining to the branch authorization policy as applicable to scheduled commercial banks. Findings of the Study Expectation from Payment Banks /Small Finance Banks in Financial Inclusion 1. A large gamut of financial Institutions and Banks are available but still penetration of financial Inclusion is not that high which was expected while RBI has launched various measures of financial inclusion. Small Finance Bank s and Private Banks are considered as major breakthrough to cover all financially excluded India. 2. Promoters or applicants of Small Finance Banks and Payment Banks were already in business of finance either through NBFC way or connected with people. Hence it is easier for them to connect with large group of people in unbanked area through their existing database also. 3. During the course of mergers and acquisitions these Banks may emerge as prospects for new private sector banks. 4. Technological advancement, Branch free network and low cost branch will help in increasing the reach and will curb the cost of maintenance of branches (area and manpower ) that can be used in innovation of practices. 5. If objective of these Small Finance Banks and Payment banks were kept in mind while extending business definitely it will not only fulfill the agenda of financial inclusion but also emerge as profitable venture in long run. This can be seen across the world i.e. Kenya, Pakistan, Nigeria, Tanzania, Phillipines etc. Conclusion In spite of major focus on Financial Inclusion by Public Sector Banks and Government the agenda was not fulfilled. Hence requirement of Small Finance Banks and Payment Banks arise, a differentiated way to achieve targets and fulfill the economic needs. The reach of Payment Banks and Small Finance Banks can become greater but only if they start reaching unbanked and remote locations which are still not tapped. But the question arises whether it is profitable for these new ventures to enter into that area VOLUME 3, ISSUE 1, MARCH

5 which may not give upfront profit /business but can be profitable in long run. Hence a proper mix of business is required for sustainability and Government support is required to fulfill dual edge agenda of sustainability and profitability. There may be stiff competition from Scheduled Commercial Banks,,Cooperative Banks and Microfinance Institutions but laid down guidelines for these differentiated Banks can work only when they follow the path laid and work on developing a model which not only fulfill Financial Inclusion agenda but also enhances profitability. But with the help of technology savy staff, new innovative products and with enhanced focus on priority sector targets will lead to great expected reform and fulfillment of financial inclusion agenda. Payment Banks Exclusive effort = Government + Reserve Bank of India Financial Inclusion Public Sector Banks Private Sector Banks Cooperative Banks Microfinance Companies Unbanked Population Exclusive effort Small Finance Banks Figure 1: Concentrated efforts towards inclusive Banking Bibliography Report of committee on medium term path on Financial Inclusion,RBI,2015. Operating guidelines for Payment Banks by RBI, October 06,2016. Operating guidelines for Small Finance Banks by RBI, October 06,2016. Small Finance Banks-Compendium of guidelines on Financial Inclusion and development by RBI, July 06,2017. VOLUME 3, ISSUE 1, MARCH

6 Role of Payment Banks and Small Banks in achieving Financial Inclusion,Gaurav Taneja and Narinder Kumar Bhasin, International Conference on Management and Information System,September 23-24,2016,page RBI Release guidelines for licensing of Small Finance Banks in the private sector, by RBI on November 27,2014. RBI Releases Guidelines for licensing of Payment Banks by RBI on November 27,2014. Small Finance Banks, An experiments of differentiated licensing by Dr Kratika Shrivastava, The Indian Banker, Volume IV, Issue10, May 2017, Page Banking and Macroeconomics, Role of Public Sector Banks in India, by Dr Charan Singh, The Indian Banker, Volume IV, Issue 12,July 2017,Page Payment banks and Small Finance Banks, opportunity and challenge for existing banks, Dr. Rashmi Tripathi, The Indian Banker, Volume IV,Issue11,June 2017,Page VOLUME 3, ISSUE 1, MARCH

IJRESS Volume 6, Issue 1 (January, 2016) (ISSN ) International Journal of Research in Economics and Social Sciences (IMPACT FACTOR 5.

IJRESS Volume 6, Issue 1 (January, 2016) (ISSN ) International Journal of Research in Economics and Social Sciences (IMPACT FACTOR 5. PAYMENT BANKS- A REVOLUTION IN FINANCIAL SYSTEM Dr. R. Sathya 1, Assistant Professor Department of Commerce PSG College of Arts and Science Coimbatore Rooplata. P 2 Ph. D Research Scholar (Full Time) Department