The Reserve Bank of India has proposed payment banks and small banks to promote financial inclusion. Payment banks will offer basic banking services like deposits and remittances, targeting migrant workers, low-income households and small businesses. They have restrictions on lending and deposit balances. Small banks also aim to increase access to financial services in unbanked rural areas. In 2014, RBI granted in-principle approval to 11 applicants to set up payment banks, including telecom and retail companies.

1. Payment Banks
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”.
The Reserve Bank of India has proposed major reforms in banking sector with
issue of 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. Reserve Bank
of India (RBI) on 17 July 2014 issued draft guidelines for two new categories of banks
small and payments.
What: 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.
The objective for “Small Banks” is to increase financial inclusion by provision of
savings vehicles to under-served and unserved 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.
WHO: 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.
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.

2. Brief Summary
Particulars Payment Bank Small Bank
Objective Provide small savings accounts and
payment/remittance services to
migrant labour.
Focus on financial inclusion in rural
area; areas of operation restricted
to contiguous districts in a state.
Min Equity
Capital
Rs 100cr; must have a net worth of
Rs 100cr at all times.
Rs 100cr.
Promoters
Holdings
40% of five years of lock in period;
to be diluted to 30% in 10 years
and 26% in 12 years.
40% initially with 5years lock in
period; to be diluted to 30% in 10
years and 26% in 12 years.
Foreign Holdings Up to 74% Up to 74%
Target Audience Migrant labour, Low income,
Households, Small business,
Unorganized entities.
Small business units, Small
farmers, Micro and small industries
and Unorganized entities.
Operational
Restrictions
Will operate in remote areas but no
branch restrictions. Cannot setup
subsidiaries.
At least 25% of branches should
be in unbanked rural centers.
Lending Cannot lend money. Can lend. Maximum exposure to
single borrower capped at 15% of
capital funds.
Cap on Deposit Yes. Customer balance cannot
exceed one lakh.
No Limit Set.
FDI As per FDI policy As per FDI policy
Statutory
Complain
Maintain CRR, SLR and 15% capital
adequacy as per Basel I norms.
Maintain CRR and investment
money in Government sector
Importance
Unlike a regular bank however, a payment bank can't loan money to people, or issue
credit cards. Also, the payment banks are only allowed to invest the money customers
deposit into government securities. While the payment banks can't issue credit cards,
they can issue ATM and debit cards. Since many of the license holders already operate
mobile wallets, the ability to issue an ATM card helps close the loop and makes it easier
to convert virtual money into cash, and vice versa.
This is also very important when considered from the perspective of financial inclusion,
as someone could now fill cash into a m-Commerce bank account from metropolitan
city, and a relative in a small town who holds the debit card could withdraw cash from
any ATM frictionless, or even in a more rural location, through any point of sale

3. terminal with a "business correspondent", essentially an authorized partner for the
bank.
Procedure
 In terms of Rule 11 of the Banking Regulation (Companies) Rules, 1949
applications shall be submitted in the prescribed form (Form III). In addition,
(Business plan, shareholding pattern in the proposed bank, financial statements,
income tax returns and credit reports for last three years, names and addresses
of banks from which credit facilities are availed, etc.).
 RBI Decision: The applications will be initially screened by RBI to ensure prima
facie eligibility of the applicants. Thereafter an External Advisory Committee
(EAC) comprising eminent professionals like bankers, chartered accountants,
finance professionals, etc. will evaluate the applications. The names of the
professionals in EAC will be placed on RBI’s website.
Approved Companies
The guidelines for licensing of payment banks were announced in November 2014 and
the Reserve Bank of India (RBI) gave an in-principle approval to 11 applicants. The full
list includes Aditya Birla Nuvo Limited, Airtel M Commerce Services Limited,
Cholamandalam Distribution Services Limited, Department of Posts, Fino PayTech
Limited, National Securities Depository Limited, Reliance Industries Limited, Shri Dilip
Shantilal Shanghvi, Shri Vijay Shekhar Sharma, Tech Mahindra Limited, Vodafone m-
pesa Limited with the RBI adding it will move to give such licenses more regularly in the
future.
The new payment banks will also make people less dependent on cash, even for
small sums, and since a mobile wallet could be a bank account soon, this move could,
over time, have a big impact on m-commerce.
Why These Companies?
The RBI guidelines say that payment bank licenses would be granted to mobile firms,
supermarket chains, and others, to cater to individuals and small businesses. The goal
is to provide small savings accounts, and payments and remittance services to a
migrant labour workforce, low income households, small businesses, and others. Of the

4. 41 companies and individuals that applied, only 11 have been selected. The companies
that have been selected right now seem to largely fit the bill.
The phone companies in particular have large distribution networks throughout
India, even in rural locations, and this will help as people will be able to easily convert
cash into virtual money and vice versa.
REFERENCES
 https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=34754
 https://www.ecb.europa.eu/paym/t2s/progress/pdf/t2s_guide_for_payment_ban
ks.pdf?5f9385f37a54346727cf15da5935c59a
 https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=32614
 https://www.pwc.in/assets/pdfs/news-alert-tax/2014/pwc_news_alert-
22_july_2014-
_draft_guidelines_for_licensing_of_small_banks_and_payments_banks.pdf
 http://www.fidcindia.org/notifications/rbi_17072014.pdf
 http://www.slideshare.net/SuparnaKorgaonkar/payment-banks-it-model
 http://telecom.economictimes.indiatimes.com/news/mvas-apps/why-digital-
payment-businesses-like-payu-mobikwik-paytm-others-set-to-boom/47046963
 http://gadgets.ndtv.com/internet/features/paytms-vijay-shekhar-sharma-on-
plans-for-the-payment-bank-730552
 http://gadgets.ndtv.com/internet/features/what-are-payment-banks-what-they-
can-and-cannot-do-and-who-will-they-affect-730073